Anyone watching the markets regularly has probably noticed long-time dormant large cap growth stocks have awoken from their lengthy slumber. While their earnings and dividends have generally been climbing every year, many of these stocks have changed little for over a decade. P/Es have compressed while their dividend yields have expanded.
It is actually surprising how long it has taken for this breakout to occur. With interest rates at generational lows, it would seem that companies with stable cash flows and generous, growing dividend payouts would be in demand. This realization seems to have hit investors suddenly sending them scurrying to these companies.
How far could this breakout carry? It would not seem unreasonable to see 20-30% gains in short order as investors scramble into these stocks simply to latch onto the momentum theme. Investors frequently exhibit herding behavior and it wouldn’t be surprising to see them rush into these stocks; especially the multitudes of baby boomer investors on the verge of retirement seeking rising dividend income.
For those interested in an ETF covering large-cap equities the iShares US High Dividend Equity Fund (HDV) would appear to be a reasonable choice. It has outperformed the S&P 500 substantially since inception (see chart at end of post).
While there is danger in pursuing momentum stocks, the companies represented in this move up are highly stable and would appear to offer a fair trade-off between risk and reward. The fact that they have been in an extended base should also offer a degree of comfort.
Could this be a trap? It is always possible the rally could sputter out or fail miserably and these stocks fall back into their old trading range, especially if the economy deteriorates, which is a real risk to investors in any equities.
Here are some charts of big-cap stocks on the move:
Johnson & Johnson
iShares US High Dividend Equity Fund ETF
Disclosure: I currently own stock of Wal-Mart, Verizon, Abbott Labs, Johnson & Johnson, and Kimberly-Clark.