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Infrastructure stocks offer higher dividend yields than their bonds

08/28/2012

Infrastructure equities may offer something their bond counterparts don’t – higher yields and the potential for growth. Many high quality companies in the communications, utilities, energy, and transportation industries currently offer wider spreads between their stock dividend and corporate bond yields than has been the case historically.

To illustrate this point, we’ve compared the current dividend and bond yields of companies in the top ten holdings of the Virtus Global Infrastructure Fund (A: PGUAX) that pay both stock dividends and a 10-year corporate bond coupon. With stocks trading higher of late, spreads between dividend and bond yields have tightened. However, this comparison illustrates the yield-boosting potential of higher quality dividend stocks, such as those found in the infrastructure space. These include telecom giants Vodafone and AT&T, whose dividend yields have recently been trending about double their bond yields, and TransCanada with a dividend yield more than 50% above its bond yield.

When you consider these companies have on average grown their dividends in the double-digit range over the last year, a strong case can be made for owning dividend-paying stocks.

Company (Ticker)

Dividend Yield
 as of 8/21/12

10-Year Bond Yield as of 8/21/12

S&P Credit Rating

Moody’s Credit Rating

% of PGUAX Portfolio
as of 7/31/12

Enbridge (ENB)

2.78%

2.93%

A-

Baa1

6.61%

AT&T (T)

4.81%

2.57%

A-

A2

5.37%

Williams Companies (WMB)

3.47%

4.24%

BBB-

Baa3

4.25%

TransCanada (TRP)

3.76%

2.40%

A-

Baa1

4.87%

Vodafone (VOD)

 5.10%*

2.48%

A-

A3

4.87%

Spectra Energy (SE)

3.84%

3.16%

BBB+

Not Rated

3.76%

Kinder Morgan (KMI)

3.66%

4.62%

BB

Ba2

3.01%

* excludes special dividend of $0.632 paid on 2/3/12.

Sources: FactSet for dividend yield, and Bloomberg for 10-year bond yield.

Holdings are subject to change and are provided solely for reference.  This information is not intended as investment advice and should not be considered as a recommendation to buy securities.

Virtus Global Infrastructure Fund Annualized Performance, Class A (in percent)

 

As of 7/31/2012

As of 6/30/2012

 

1 year

 

5 year

Since inception 12/30/2004

 

1 year

 

5 year

Since inception 12/30/2004

NAV

11.44

3.90

7.29

6.08

2.48

6.92

POP

5.03

2.68

6.45

-0.02

1.28

6.08


POP (Public Offering Price) performance reflects the deduction of the maximum sales charge of 5.75%. A contingent deferred sales charge of 1% may apply on certain redemptions made within 18 months following purchases on which a finder's fee has been paid.

Fund class operating expenses are 1.34%
.

Performance data quoted represents past results. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.  Investment return and principal value will fluctuate so your shares, when redeemed, may be worth more or less than their original cost. Please visit Virtus.com for performance data current to the most recent month-end.

Fund Risks

Investing internationally involves additional risks such as currency, political, accounting, economic, and market risk.

Investing in high yield bonds may subject the portfolio to greater credit and market risks.

Infrastructure related entities are subject to factors that may adversely affect their business including government policies and regulation.

The use of leverage, short selling, futures, options and/or derivatives may cause exposure to additional risks.

A portfolio that is heavily weighted in a single sector will be impacted by that sector's performance more than a portfolio with broader sector diversification.

Please carefully consider the investment objectives, risks, charges, and expenses of the Fund before investing. For this and other information about any Virtus mutual fund, call 1-800-243-4361 or visit Virtus.com for a prospectus. Read it carefully before you invest or send money.

 

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.