Beyond Bulls & Bears

The Search for Yield in a Low-Rate Environment

Scarcity is one of the most fundamental concepts of economics. When something in demand grows increasingly scarce, obtaining it comes at an increasing cost. Conservative investors have lately been facing a scarcity of yield amid a near-zero interest rate environment in the U.S., a situation that looks likely to continue into the foreseeable future. So what are the options for investors? Putting money in the bank? Parking it in U.S. Treasuries?

Finding yield right now may be a difficult task, but Ed Jamieson, portfolio manager of Franklin Small-Mid Cap Growth Fund and CIO of Franklin Equity Group® overseeing global growth, core and hybrid strategies, and Bill Lippman, CIO of U.S. Value for Franklin Equity Group and portfolio manager for several funds, including the Franklin Rising Dividends Fund, believe it’s not an impossible one. There are always opportunities to capture yield…if you are willing to shoulder the price of the associated risk. In their words:

  • We look at the return profile for a company historically, and we project that out three to five years.
  • A low-interest rate environment generally benefits heavy borrowers, whose cost of borrowing will be kept low.
  • We believe investors tired of little return may move out on the risk spectrum in search of more potential return.
  • Dividends can indicate a company cares about its shareholders.
  • Dividends look like they’re “here to stay.”

Since December 2008, the U.S. Federal Reserve has held its key short-term interest rate near zero, and at its late January 2012 policy meeting, expressed no plans to change this dovish stance until at least through late 2014.While a low-rate environment can help stimulate lending at the business and consumer levels, the flip side is that savers and investors have to balance the desire for potential return with the prospect of additional risk.  Ed Jamieson’s thoughts on this low-rate conundrum:

Ed Jamieson

“Winners are generally those who are heavy borrowers, whose cost of borrowing will be kept low. Losers are lenders and savers, such as retirees who live on interest and dividends, and banks and other companies who get a substantial amount of their income on float.

Historically, lower interest rates have led to a weaker dollar, which makes our exports and domestically-produced products more competitive. It also boosts the value of foreign profits for multinational corporations. And, of course, capital costs for borrowers of U.S. dollars drops when rates decline. So many non-financial corporations should find this policy favorable.

Looking at lower rates from another perspective, they should be good for equity markets, as investors are getting tired of getting so little return in the money market and Treasury bills. I think it seems likely they will end up moving out on the risk spectrum in search of more potential return, possibly into high-yield bonds and stocks.

In my view, the only un-crowded trade out there is really in stocks. I think, more recently, investors are willing to take on more risk (with stocks) in their search for potentially higher return.

Today as I see it, there seems to be an attractive trade-off between risk and return in the equity markets. And I think the strength in company fundamentals is beginning to command more mindshare and to loom larger, and investors like what they see.”

What About Dividend-Paying Equities?

Yield-scarcity has also been driving investors to consider the option of dividend-paying equities. In December 2011, the average dividend yield of stocks in the Standard & Poor’s 500® Index (S&P 500®)2 exceeded the yield on the 10-year Treasury note, which is not a common event. (See chart below3 for yield comparisons as of 12-31-11.)

This chart is for illustrative purposes only and does not reflect the performance of any Franklin, Templeton or Mutual Series fund. Sales charges, fees and expenses are associated with Franklin Templeton fund investments, which reduce investment returns. Treasuries, if held to maturity, offer a fixed rate of return and fixed principal value; their interest payments and principal are guaranteed. It’s important to note that CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per owner and offer a fixed rate of return.

Bill Lippman believes “dividends are here to stay.” Why are dividends important? In his opinion:

Bill Lippman

Paying dividends can tell us something about the company and its management. One: it says the company earns a profit consistently, so it can pay a dividend. Two: the company cares about its shareholders. Not all management does. We find some companies that, when we read the proxy before we get deeply into it, the management is in there to benefit itself, not its shareholders. That’s not for us. And if the company pays a dividend, to us it means it cares a little bit about the shareholders, it wants to give them something. Three: it provides some consolation and some value in a really bad market. It’s nice to know if your stock is going down or your mutual fund is going down—it’s not a pleasure—but it’s nice to know that there is the possibility of some money coming through on a regular basis.”

We’ll leave you with a nugget from the late Sir John Templeton on choosing your investments. “People will tell you: Investigate before you invest. Listen to them. Study companies to learn what makes them successful.”

Want to know more about dividends and yield? Read “Yield Scarcity: The Case for Dividends” and “In Search of Dividends.”

Compare the yields on taxable and tax-free income investments with our Taxable-Equivalent Yield Calculator

What Are the Risks?

All investments involve risks, including possible loss of principal. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in a fund adjust to a rise in interest rates, the fund’s share price may decline. The risks associated with higher-yielding, lower-rated securities include higher risk of default and loss of principal.

Investing in dividend paying stocks involves risks. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Companies cannot assure or guarantee a certain rate of return or dividend yield; they can increase, decrease or totally eliminate their dividends without notice. A fund’s investment return and principal value will fluctuate with market conditions, and it is possible to lose money.  


Value securities may not increase in price as anticipated or may decline further in value. While smaller and midsize companies may offer substantial opportunities for capital growth, they also involve heightened risks and should be considered speculative. Historically, smaller- and midsize- company securities have been more volatile in price than larger company securities, especially over the short term. These and other risks are detailed in the Franklin Rising Dividend Fund’s prospectus.

Investors should be comfortable with fluctuations in the value of their investment, as small- and mid-sized company stocks can be volatile, especially over the short term. Smaller or relatively new or unseasoned companies can be particularly sensitive to changing economic conditions, and their prospects for growth are less certain than those of larger, more established companies. The fund includes investments in the technology sector, which has been highly volatile and involves special risks. These and other risks are detailed in the Franklin Small-Mid Cap Growth Fund’s prospectus.

1 Source: U.S. Federal Reserve.

2 Source: U.S. Federal Reserve and Robert J. Shiller, “Irrational Exuberance,” 2nd Edition, 2005, as updated by the author. One cannot invest directly in an index.

3 Sources: S&P 500 Index: STANDARD & POOR’S®, S&P® and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC. Standard & Poor’s does not sponsor, endorse, sell or promote any S&P index-based product. Treasury Yields: Federal Reserve H.15 Report. CD and Money Market Yields: BanxQuote®, Copyright © 2012 BanxCorp. All Rights Reserved. BanxQuote® is a registered trademark and servicemark of BanxCorp. Indexes are unmanaged, and one cannot invest directly in an index. Past performance does not guarantee future results.

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