Blinded by Convention

Are we missing something here? Traders have kept a solid bid under the large-cap dividend-paying stocks in this market environment while, at the same time, they've shunned the high-yield corporate-debt market. We tend to view the risk profile of high-yield corporate debt as being in close proximity to dividend-paying stocks. Both asset classes are tied to broader equity-market movements, and both groups are at the mercy of economic conditions and the companies' ability to pay a dividend.

DVY -- Daily Source: MetaStock View Chart » View in New Window »

Nonetheless, over the past two years we have seen dividend-yielding stocks outpace high-yield debt on a comparative relative basis, and by a wide margin. See the below chart of iShares Dow Jones Select Dividend Index Fund (DVY).Traders are willing to pursue a 3% yield in equities, but they are unwilling to take a similar risk for a 7.5% yield in corporate debt. In our opinion this is an issue of perception. Traders as a general rule like to stick with conventions -- and, at the moment, high-yield debt is simply perceived to be riskier than dividend-yielding stocks. However, we don't believe this reflects the reality, and we see this misperception as an opportunity in high-yield corporate debt....320 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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