We frequently hear that investors want to own "dividend-paying" large caps. This is mostly true, but something bigger has been happening that I'd like to explore today.
First, it's important to realize how new this trend is. The S&P 500, an index of large-cap stocks, is up almost 7 percent in the last year (through yesterday's close). The small-cap Russell 2000, meanwhile, has lost 1.6 percent of its value in the same period. This marks a major change from the preceding decade, when small caps consistently outperformed in positive markets.
Second, the story is less about market cap and more about business and sector. Occidental Petroleum, for example, is 9 times bigger than Kimco Realty. But it's down 11 percent in the last year, while KIM is up more than 2 percent.
Most of the strength has actually come from consumer staples, health care, pipelines, utilities, and real-estate investment trusts. Other S&P 500 companies have lagged, especially in energy, materials, and the financials.
Two big themes are emerging. The first is that people seem to be shying away from stocks that are economically sensitive or "pro-cyclical." This is not a surprise because the global economy is looking increasingly weak.
The second theme is that investors want companies with real assets that will keep their value long into the future. Utilities and REITs fit this bill admirably because they own transmission lines, rights-of-way, and buildings. Pharmaceuticals also work well because their patents ensure similar long-term cash flows.
American Tower and SBA Communications embody this theme. As owners of cell-phone towers
, they were relatively obscure tech companies for years but have caught fire recently by restructuring themselves into REITs. AMT's dividend is less than 2 percent and SBAC doesn't even pay a dividend.
In contrast, a financial like Annaly Capital Management, which has a comparable market cap and a much higher dividend, has gone nowhere. That demonstrates that the story isn't about the yield per se, but the kind of business.
The trend also emerges in the energy sector, where refiners have outperformed oil producers. After all, their physical plants will continue to generate cash indefinitely. In some ways they're like cell towers because, as much as people rely on gasoline, no one wants to let new ones be built.
Also look at Latin American brewers
Ambev and Cervecerias Unidas. The region has performed terribly over the last year, but these stocks have been trending higher because they have deep roots--not just in the economy but in the society. Again, the bias is toward non-cyclical sectors such as consumer products, utilities, and pharmaceuticals.
The new sentiment only began in earnest last summer, as China slowed and fiscal angst engulfed Europe. Over preceding decades, investors had always focused on growth--whether it was in technology, mortgages, emerging markets or commodities. This remained true even after the mortgage bubble burst, when money rushed back into energy and materials.
But now a very different future stands before us, marked by heavy debt, low birthrates, and increasingly bad leadership in government and central banks. It's hard to see anything changing soon, so this new trend toward safety could last a long time.