High dividend stocks may find favor as market headwinds abound

High dividend yield stocks such as telecoms and utilities are looking more tempting as investors become increasingly nervous about the outlook for equities and as U.S. Treasury yields hover near a 10-month low.

The wide spread between the 10-year Treasury note and high-dividend payers, coupled with these stocks’ reputation as a safer play, could tempt investors to move away from high growth names. 

A nuclear test from North Korea on Sunday rattled investors when markets opened on Tuesday after the extended holiday weekend, pushing the yield on benchmark 10-year Treasury notes US10YT=RR to a 10-month low.

Investors typically prize high dividend players in a low rate, low growth environment, as they search for high yielding and stable instruments. 

Fund managers already seem to be picking up some of these stocks. On a sector basis, weekly inflows for utilities were among the strongest, relative to assets under management, at 1.9 percent according to data from Credit Suisse through Sept. 1. 

Stocks in the telecom and utilities sector have some of the highest dividend yields in the S&P 500. Telecom CenturyLink (CTL.N) has a dividend yield of 11.4 percent, top in the index. Utilities FirstEnergy (FE.N) and Southern Co (SO.N) both have dividend yields above 4.5 percent. 

Meckler said investors are now more confident these sectors can compete with the yield on the 10-year at such a low level.

Stubbornly low bond yields can be of concern to equity players because they are forced to take bigger risks as they search for higher returns. They also raise red flags about the health of the economy. 

Yields fell even further on Friday, to 2.016 percent, after New York Fed President William Dudley struck a less hawkish tone about rate hikes, while still defending them, in a Thursday night speech.