However, there are segments of the dividend space that still look interesting: international and global dividend stocks. Here are two reasons why:
Stocks are still cheaper than bonds. While stocks (IVV) are no longer cheap, they are cheaper than bonds (AGG). One way to measure this – particularly for investors focused on income – is to compare the yield available from a bond fund (TLT) to the yield available from an equity alternative.
Since 1995, the dividend yield on a broad global benchmark (the MSCI World) has, on average, been 40% of the yield generated from an investment-grade bond index (Moody’s Aaa). Today the ratio is closer to 60%, as the figure below shows.
While this is below the record of 80% recorded two years ago, it still compares very favorably with the norm. In addition, equities have three additional advantages over bond alternatives: tax treatment favors dividends, stocks have the prospect for future capital gains and stocks can provide a better inflation hedge.
Market Realist – Many studies have shown that stocks act as a good inflation hedge in the long term because stocks are inherently claims on real assets, which appreciate as overall prices increase.
According to Jeremy J. Siegel, a professor at the University of Pennsylvania’s Wharton School, stocks’ inflation-adjusted returns over a 30-year period are unaffected by the inflation rate. According to Siegel’s studies, the price level as measured by the consumer price index has increased by ten times since January 1947. Meanwhile, the S&P 500 (SPY) has risen by more than 90 times during the same period.
But at the same time, you need to consider that U.S. equities (IVV) don’t act as an inflation hedge in the short term. International stocks and emerging markets (EEM) could prove to be a good option for you moving forward.
Read on to the next part of this series to see how international dividend funds provide better value.