Markets

Oppenheimer's Belski: With Ten-year Yields at 3%, Invest in Large-Cap Dividend-Growing Stocks

June 10, 2011

6 minute read

Belski shares his best investment idea right now:

PREWITT: Well, what is your best idea right now?

BELSKI: We - our best idea is high quality dividend growth companies given the fact that now that yields on the ten year are hovering around three or just under that, we think investors will once again come back to equities as a source of yield. We think the move back into bonds has been purely reactive and more defensive.

We want to buy those large cap companies, Ken, that are delivering cash flow, and with that cash flow, they are growing their dividend. This is not a high yield strategy. It's a dividend growth strategy. And, oh, by the way, that particular strategy has significantly outperformed the market year to date.

PREWITT: Okay. A couple of examples here because it came up earlier this morning, AT&T and Verizon, both around 5.5 percent dividend yield.

BELSKI: Again, it is not about the dividend yield. I don't want your listeners to focus on the dividend yield, Ken. It's about those companies that have higher than dividend yield than the market, but are growing the dividend.

Here is an example. You want to try to buy a company that has a 2.5 or three percent dividend yield, that has a higher propensity to grow that yield eventually to four or five percent because they have good cash flow and good earnings growth.

You don't want to buy just those companies with high yield because those companies in particular, especially electric utility companies, have a high propensity to cut the dividend. That's not the same strategy.

PREWITT: Okay. What industries look the best here?

BELSKI: From our work, again, we try to be in sectors for a three to five year time period. And over the next 12 to 18 months from a fundamental perspective, we continue to think that industrials and technology look the best. In fact, from a quality standpoint of view, if you use S&P quality ratings, there is a higher percentage of high quality companies in industrials than any other sector.

Now, we've changed our focus a little bit, Ken, in industrials to more of a domestic, more conglomerate type of focus, away from solely relying on machinery stocks that really have done a lot of business with emerging markets in the last few years since emerging markets have slowed a little bit. We are more focused on defense companies, conglomerates, electrical companies, railroads, transports here in the U.S.

PREWITT: Everybody - we haven't heard the word Asia yet. Everybody we've talked to over the last couple of years says Asia, Asia, Asia, China, China, China. Is that over with?

BELSKI: I don't think it is over with. I think we are starting to come to the fruition that we are starting to see the maturing process of a country and its economy. I mean you are not going to be able to see that type of expansive growth that we saw for all intents and purposes for ten years continue.

So for a very long term perspective, more the secular trends, we believe that it is very positive that we've seen a slowdown there given the fact that they need to digest some of these gains, number one.

You know, number two, it also, from an investment standpoint, we have to kind of take a step back and come back to reality that we are not going to see those types of investment returns. That is why a couple of weeks ago, in our weekly report, we talked about this transitional market overall that we think we're in somewhere between a secular bear and a secular bull. I think we are closer to a secular bull, by the way.