By David Randall
NEW YORK, July 19 (Reuters) - An expected interest rate cutby the Federal Reserve later this month is pushingyield-oriented U.S. fund managers further afield in search ofincome at attractive prices.
While nearly half of the companies in the S&P 500 have ahigher dividend yield than the roughly 2.04% yield thatbenchmark 10-year Treasuries now offer, value-conscious fundmanagers say they are hesitant to buy shares of companies individend-rich utilities or the real estate sector because theirvaluations are well above historical norms. Instead, fundmanagers say, they are picking up yield in sectors ranging fromenergy to technology.
"You can't just throw a dart because some of these typicalsafe-havens are trading at much higher market multiples thanthey typically do," said Gary Bradshaw, a portfolio manager ofthe $25 million Hodges Blue Chip Equity Income fund. "It's hardfor me to buy a utility company when I could buy a company likeHome Depot," which increased its dividend by 32% in March andwill likely benefit from a pick-up in the housing market, hesaid.
Shares of Home Depot Inc yield 2.52% and are upnearly 25% year-to-date, as of Thursday's market close, comparedwith a roughly 18% gain in the benchmark S&P 500 over the sameperiod. The S&P 500 as a whole yields 2.38%.
With negative bond yields in Japan and Europe, the Fed willlikely keep U.S. interest rates low for a "very long time,"Bradshaw said, putting a premium on companies that can growtheir dividends and maintain their yields.
Other fund managers are rotating out of the bond market insearch of income from equities, which they say appear to offermore sustainable sources of yield.
"Obviously, equities are yielding more than bonds here andthat's the game that everybody has to play," said David Clott, aco-portfolio manager of the $1.3 billion Westwood IncomeOpportunity fund. "The low yields in the fixed-income market aremaking you take risk elsewhere."
As a result, Clott has been reducing his exposure toTreasuries and adding shares of companies like AT&T Inc,which yields 6.13% and has a trailing price-to-earnings ratio of12.9. Shares of the company, which plans to launch a streamingservice next year to compete with Netflix Inc, are up16% for the year-to-date.
Robert Leininger, portfolio manager of the $2.4 billionGabelli Dividend & Income Trust closed-end fund, said he hasbeen adding to his stake in companies such as alcoholic beveragecompany Molson Coors Brewing Co and energy giantSchlumberger NV whose share prices have underperformedthis year. Molson Coors, for instance, is down 3.8% for theyear-to-date and offers a dividend yield of 3.02%, whileSchlumberger is up 5.5% over the same time and yields 5.18%.
"It's been a market that has been focused on growthinvesting for close to a decade now," Leininger said, undulypunishing otherwise-strong companies that may hit temporary roadbumps.
Michael Barclay, a portfolio manager of the $15.1 billionColumbia Dividend Income fund, said he is focusing on picking upincome in the technology sector because its strong growth rateswill allow companies to increase their dividend payments overtime.
While Cisco Systems Inc, Microsoft Corpand Apple Inc are among his fund's largest holdings,Barclay has also been looking more recently to semi-conductorcompanies, which are insulated by high barriers to entry andhave high free cash flows at a time when other high-dividendsectors like consumer staples have been increasing theirleverage.
"At this point in the cycle, it's really important to focuson the balance sheet and have as much confidence that you canthat a dividend is not going to be cut," he said.(Reporting by David Randall; Editing by Jennifer Ablan andLeslie Adler)