High-yield stocks in demand

High-yield stocks in demand given soft interest rates: DMG

WITH interest rates set to remain soft, stocks with a high dividend yield are expected to pack a hard punch.

According to DMG & Partners analyst Leng Seng Choon, such stocks are going to become more attractive to investors as interest rates in Singapore and the US stay low.

Despite remarks made by US Federal Reserve chairman Ben Bernanke earlier this month that further interest rate cuts are unlikely, high US unemployment could keep rates down.

And with local deposit rates starting at 0.325 per cent and capped at one per cent, stocks with dividend yields of more than 3 per cent look significantly more enticing in comparison.

Mr Leng pointed to stocks like ComfortDelGro and Suntec Reit, with current dividend yields of 6.6 and 5.1 per cent, respectively.

'Apart from their higher yields compared with fixed income instruments, these stocks also have growth prospects coming from business expansion,' said Mr Leng.

Local interest rates are expected to stay low despite the spike in Singapore 10-year government bond yields to 3.6 per cent.

'The spread of the US 10-year bond yield over the Singapore equivalent is now 40 basis points, significantly lower than the 110 basis point average over the past five years,' said Mr Leng. 'We see the likelihood of further spread-narrowing as very low and this points to limited upside for Singapore 10-year government bond yields.'

The US 10-year government bond yield has risen from 3.3 per cent to 4 per cent since mid-March this year.

Its Singapore counterpart has recorded a swift rise from 2.3 per cent to 3.6 per cent over the same period, which Mr Leng said could be due in part to inflation concerns here.

'We note that the current 3.6 per cent yield on Singapore 10-year government bonds may lead to some switching out of dividend yield stocks to these bond instruments,' he said. 'But stocks that offer high dividend yield remain interesting, particularly if they have accompanying growth prospects.'

The spike in the 10-year government bond yield is not expected to spill over into Sibor rates, Mr Leng told BT. 'Even in a hypothetical scenario of the US Fed Fund rate rising, the current narrow spread provides scope for the three-month Sibor to remain soft.'

The spread between the US Federal Funds rate over the three-month Sibor rate is now 0.7 of a percentage point, against a three-month average of 1.5 percentage points.

The low rates paid by other fixed-income instruments like time deposits are also expected to continue, further fuelling the attractiveness of high-yield stocks.

'As long as Sibor rates are low, time deposit rates will stay low,' Mr Leng said.

Published June 13, 2008
Singapore Companies
By JOYCE HOOI