High dividend yield picks

OCBC on 20 June 2012

The win of the pro-bailout parties in Greece has been overshadowed by concerns about Spain and Italy. Despite the EUR100b bank bailout, Spain’s 10-year bonds reached record highs on Monday, rising above 7%. Investors are still cautious and a risk-off environment is likely to persist. We believe that high yield stocks like REITs and Telcos will continue to outperform as they have so far this quarter. In particular, stocks with strong financial positions and high earnings quality will be better positioned. We are still OVERWEIGHT on the Telecommunications and REITs sectors. We have ranked all the stocks under our coverage by expected FY1 dividend yield. Our high dividend yield plays are Cache, CDLHT, CMT, M1 and SingPost.

Uncertain environment for Europe continues
The win of the pro-bailout parties in Greece this past Sunday has been overshadowed by concerns about Spain and Italy. On Monday, Spain’s benchmark 10-year bond yields reached record highs above 7% despite the recent EUR100b bank bailout. Italy's 10-year bond yields rose above 6%. The crisis in Europe is likely to take years to resolve.

Asia still fragile
The slow recovery in the US and the reduced consumer demand in Europe are affecting Asian countries with significant export-exposure. Earlier this month, the People’s Bank of China made its first rate cut since 2008, reducing key rates by 25 bps. The surprise move was read as a sign of how poorly the Chinese economy has been performing. Yesterday, the commerce minister of China said that the country is heading for a rebound this month following government measures to promote growth, but it remains to be seen if China has indeed bottomed out.

Hunt for yields
With the mixed and fluid global economic backdrop, investors are still cautious and we expect a risk-off environment to persist. High dividend yield stocks have performed well this quarter, with the Telcos and REITs being two of the three top performers among the 14 FTSE ST sector indices. The FSTTC Index (Telecoms) and the FSTREI Index (REITs) moved 2.4% and -0.4% respectively since the end of Apr. The other top performer was the FSTTC Index (Technology), which climbed 0.8%. The STI has declined 4.6% over the same period. We believe that high dividend yield stocks will continue to show strength.

Strong financial positions for our dividend picks
After ranking the stocks under our coverage by estimated FY1 dividend yield, we further screened for preferred stocks which have good financial positions and high quality earnings. We are still OVERWEIGHT on the Telecommunications and REITs sectors. Our high dividend yield picks are Cache, CDLHT, CMT, M1 and SingPost .