O'Shaughnessy Asset Management

Investor demand for high-yielding companies has grown even stronger because of the perception that these companies are more defensive and recent news that the Federal Open Market Committee (FOMC) has extended its forecast of low rates until 2015. We believe buying a portfolio of high-quality, global, market-leading companies with superior valuations and high dividend yields provides investors with an excellent opportunity to consistently beat the market, while providing high income relative to fixed income securities in the current environment.

First, we look at the prospects for the two assets classes that comprise a majority of investors portfolios: stocks and bonds. Second, we review one of the most tried-and-true investment strategies that has been a part of the investment lexicon since the beginning of the modern investment era: dividends. But we do so with a caveat global dividends. Finally, we review the results of two strategies back to 1977 to demonstrate the applicability of our approach. We think you will find the results both eye opening and compelling.

Many investors are fed up with yields on fixed income securities and are in search of higher yield. As a result, U.S. stocks with high yields have become very popular with individual and professional investorsbut we believe that investors are looking at the wrong kind of yield. Though dividend yield works very well internationally, investors in U.S. stocks should instead focus on shareholder yield, a factor we have long advocated that has provided considerably stronger returns for U.S. stocks for more than 80 years.

Mike Tyson once warned, Everyone has a plan until they get hit in the face. The plan, for investors, is to be disciplined and not react emotionally. But right now the enemy is panic and Tyson is the market.There is no question that the level of debt in the U.S. and the financial weakness of other countries are alarming. However, the future of the S&P 500 is not likely to be tied to the current state of the economy. If any relationship exists between the market and the economy through history, it is a negative one where investors should be buyers of equities when GDP growth is negative.

With the Federal Reserve well into QE2 in its response to the recent economic crisis and recession, we thought it would be an ideal time to review the effects of inflation and deflation on the returns of US bonds and stocks. The adjusted monetary base for the United States has exploded over the last several years. As a result many economists and investors expect inflation to increase in the coming years. Let?s review the history of US inflation and the returns for U.S. stocks and bonds and see what it can teach us about the returns of stocks and bonds during a variety of inflationary periods.

Patrick O'Shaughnessy examines the relationship between historical unemployment levels, GDP growth rates and marginal tax rates with subsequent equity returns. The data suggests that while worries about the economy are legitimate, those fears do not necessarily translate into weak prospects for stocks. While economic variables are not good indicators of future stock returns, the market's price-to-earnings ratio has been a good indicator in the past, and it continues to suggest the market is a good buy today.

From an entirely rational perspective, the last few weeks of volatile market declines have created a strong opportunity for investors. The average stock in the S&P 500 is 13 percent cheaper than it was on April 23, 2010 - a fine bargain considering nothing much has changed about sales and earnings prospects. Unfortunately, fear has and will continue to precipitate selling, when it should do the opposite. A recent Stanford study yields interesting insights into the impact of fear on investors.