yields are a credit to their asset class

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Jay Powell, chair of the US Federal Reserve, has confirmed what the bond market had already surmised: the pace of US price inflation has peaked. US Treasuries and other global bonds have rallied over the past month. All stock markets have rebounded. Equities with high dividend yields deserve more attention.

Grumpy bond market veterans occasionally refer to stocks simply as poor quality credits. Buy these at your peril as you may never get your capital back, they caution.

Yet select carefully and some stocks offer something different, a profitable proxy for bonds. Companies with high dividend payouts backed by stable free cash flows can offer good value. Shunned by bond investors, they may also be overlooked by equity fund managers whose main concern is earnings growth.

A sharp drop in market interest rates makes such shares much more attractive. The prices of some of America’s highest yielders began to charge upward when US long bond yields peaked in mid-October.

Telecoms stocks are worth a look. Forecast free cash flow for Verizon and AT&T is roughly double estimated cash dividends for the next two years, according to analyst data on Visible Alpha. Both shares have rebounded about 15 per cent in the past eight weeks, outpacing the S&P 500 index. They still offer yields of about 7 per cent.

White goods maker Whirlpool — on a 6 per cent yield — has cut prices this year because of declining demand. As such, any investor bearishness may have already washed out. Whirlpool should easily cover its expected dividends with free cash flow in the next two years.

European companies depend more heavily on dividends for shareholder loyalty than US peers. Yields can be much higher, especially for companies in structurally weak sectors. Groups such as telecoms operator Vodafone and cigarette company British American Tobacco both have double digit yields. That is as much a reflection of investor dismay as corporate largesse.

Both may acquire more attention this month if bond yields in Europe keep falling. Ten year Bund and gilt yields have collapsed in the past month. Both companies should cover their high payouts, as should automaker Mercedes-Benz.

As the spectre of inflation recedes, share prices — which discount future cash flows — re-rate upward. That effect should be amplified in bond proxies.