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By Daniel Solomon  | Monday, May 14, 2012

As we have been forecasting for some time, government bonds appear to have hit a wall in the first quarter. The DEX Government Bond Index returned -0.80%, while the broader DEX Universe Bond Index declined 0.21%. By contrast, the DEX Universe All Corporate Bond Index gained 1.42% in the first quarter as spread tightening compensated for higher government bond yields. With spreads narrowing to just over 600 basis points above Treasuries, high-yield bonds once again led the way in fixed income markets, with the Barclays US High Yield 2% Capped Index returning 5.35% over the first quarter.

Investment themes

Credit spreads between high-yield bonds and US Treasuries tightened over the first quarter in light of encouraging economic data in the US and an easing of the crisis climate in the eurozone (in January and February at least) fueled by a “risk on” sentiment among investors. Even though risk aversion returned to the markets in March, by the end of the quarter, the spread between high-yield bonds and US Treasuries was still above 600 basis points – higher than the 20-year average (Chart 1).

Chart 1

Given that the real yield for most US Treasuries has been negative for almost a year (e.g., after adjusting for CPI, 10-year Treasury notes are actually yielding about -0.70%) and investors’ continued focus on yield, we believe that the case for high-yield bonds will continue to be a compelling one for the foreseeable future.

Get paid to wait

Investing in high-quality dividend-payers is a story that continues to enjoy support from current market trends. According to Standard & Poor’s, more S&P 500 companies are paying dividends than at any time since 2000. And during the first quarter, Apple Corp. joined seven other corporations in announcing that it would initiate dividend payments this year.

Underscoring the dividend theme is the fact that during the first quarter, the average dividend yield on US equities converged with, and eventually exceeded, the yield on 10-year Treasuries – historically speaking, a rare occurrence. On April 13, 2012, the average dividend yield on the S&P 500 was just over 2% (2.03%) compared with a yield of 1.98% on US 10-year Treasuries (Chart 2).

Considering that in the first three months of 2012, 30% of S&P 500 companies currently paying a dividend announced increases to their payouts and assuming even flat to modest earnings growth, the average dividend yield on US stocks could continue to trend higher.

Chart 2

In Canada, the story was similar and even stronger. As of April 13, 2012, the average dividend yield on the S&P/TSX was 2.85% versus 1.98% for Government of Canada 10-year bonds.

Historically dividends have comprised a significant portion of total return. Based on current valuations, which remain attractive relative to earnings, and the long-term outlook, investors in high-quality dividend-payers today could benefit from both current yield and future price appreciation. Our dividend focused mandates seek out and invest in many of the companies that fit this profile.


We expect economic uncertainty and market volatility to remain at heightened levels. Unfortunately, there is no silver bullet solution to solve the pivotal issues weighing on the global economy and capital markets, in particular the situation in Europe.

Amid this environment, we expect high-yield bonds and high-quality dividend-paying stocks to be enduring themes in 2012. High-yield bonds offer compelling opportunities for income-oriented investors and for those with longer-term investment horizons. The Northwest Specialty Global High Yield Bond Fund and Northwest Specialty High Yield Bond Fund are managed by high-yield experts Aviva Investors. Both funds have been ranked in the top 10 for three year performance by Investment Executive*. Dividend-paying stocks continue to represent great investment opportunities; especially global dividend-payers. The Ethical Global Dividend Fund has consistently outperformed its benchmark (MSCI World Index).

*Investment Executive January 2012

For more information on our outlook and solutions from NEI Investments, contact your contact your NEI Investments sales representative at 1-888-809-3333 or visit

Daniel Solomon, CFA, is Chief Investment Officer for NEI Investments. He is responsible for generating investment performance across NEI’s product line-up through the selection and management of outstanding independent sub-advisors and oversight of NEI’s investment strategy and portfolio construction process.

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NEI Investments endeavors to ensure that the contents have been compiled or derived from sources that we believe are reliable and contain information and opinions that are accurate and complete. However, NEI Investments makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein. Mutual funds are sold by prospectus only through registered dealers. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

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