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Today's Market Favorites: Defensive Sectors and High Dividend Payers

September 17, 2012

The uncertainty and volatility dominating equity markets
in recent quarters has led investors to seek shelter in
perceived safe haven investments such as defensive
sectors of equity markets and high dividend paying
stocks. 
-Manning & Napier


The uncertainty and volatility dominating equity markets
in recent quarters has led investors to seek shelter in
perceived safe haven investments such as defensive
sectors of equity markets and high dividend paying
stocks. The strong performance of these areas is a direct
refl ection of investors attempting to avoid ongoing market
volatility, which they believe could translate to sustained
losses (i.e., capital risk). Importantly, however, investors
jumping on the bandwagon late are fi nding it more and
more expensive to get defensive. This begs the question:
will protection today lead to disappointment tomorrow?
For investors whose primary goal is to capture compelling
absolute returns over the long-term, we believe the answer
is "yes".

Today, the risk/reward tradeoff provided by defensive
sectors and companies that pay a high dividend is skewed
toward the risk side, as many of these companies may be
overvalued relative to history and other areas of equity
markets. The below chart shows that high dividend paying,
low growth companies are currently trading about two
standard deviations above their long-term average. Stocks
with the highest dividend payout ratios are trading at a
roughly 15% premium to the market.

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