January 7, 2022
John Tobin, portfolio manager of the Epoch Global Equity Shareholder Yield Fund, spoke to Barron’s about his views on dividend stocks in the year ahead:
In 2021, (Tobin) says, he saw “a market that flipped and flopped” and “there was this push and pull over the course of the year” between growth and value stocks. The Russell 1000 Growth Index returned 27.6% last year, a little ahead of the 25.2% for the corresponding value index. His fund returned 17.4% in 2021, placing it around the middle of its Morningstar peer group, the world large-stock value category.
Value stocks got off to a good start last year, as Covid headlines were a big driver of investor sentiment, along with the 10-year US Treasury note’s yield. That yield topped 1.7% last March, a positive sign for value stocks as investors expressed confidence in the economic recovery. But the yield retreated below 1.2% in August, though it’s moved higher again.
“We had period early in the year when it looked like a reopening trade was gathering momentum and value stocks were doing well,” Tobin recalls. And that helped dividend stocks, many of which have value characteristics.
But that outperformance for value didn’t hold up throughout 2021. “You could almost track how equity-income stocks did by looking at what the 10-year [Treasury] did,” says Tobin. “When the 10-year [yield] retreated and people were concerned about slowing growth, that was a headwind for us.”
Looking ahead, Tobin sees upside for value stocks—and, by extension, dividend names. He frames the value-growth dynamic in bond terms, drawing on his background as a fixed-income investor. He refers to companies such as Tesla (TSLA), a classic growth story, as high-duration stocks, vulnerable to higher interest rates. In contrast, he considers Toyota Motor (7203.Tokyo), more of a value name, to be a low-duration stock.
Why? “The valuation of a company like Tesla is based on an expectation that in the coming years, revenues, earnings, and cash flows are going to continue to grow rapidly and will be much larger than they are today,” he says. In contrast, Toyota “doesn’t have the growth trajectory that Tesla has today” and by that reasoning is less vulnerable to higher interest rates, which the Federal Reserve indicates are coming.
“It’s not to say that these aren’t good businesses with good prospects,” he says, referring to Tesla and other high-duration stocks. But “growth stocks almost by definition are long-duration stocks versus value stocks.”