The U.S. stock market reached record highs today, primarily on the strength of a report on capacity utilization issued by the Institute for Supply Management (ISM). After initially releasing numbers that were disappointing, ISM issued a correction showing healthy growth in factory activity.

The ISM report is generally regarded as one of the more reliable leading economic indicators since manufacturers are usually the first to react to consumer demand by adjusting factory utilization accordingly. Today’s revised report showed an uptick in factory activity of a little under 1% from the previous month, rising from 54.9 percent in April to 55.4 percent in May.

However, the initial report indicated a decrease to 53.2 percent, which made investors nervous and resulted in a small sell-off before the corrected figures were made public. That figure would have represented a 3 percent shortfall from the consensus estimate of 55.5 percent, so the concern was understandable.

However, now that we have affirmation that the U.S. economic recovery is continuing in the face of Fed tapering, investors are confronted with the quandary of embracing this somewhat confounding phenomenon or simply deciding to go along with it. While the current level of stock market valuation may make many investors nervous, the alternatives are even less appealing.

In short, the U.S. stock market has become the only viable option for investors seeking growth OR income. It used to be that income investors had to choose between higher income now in the form of bonds which offered little if any potential for capital appreciation, or lower income now from stocks but with the tantalizing promise of appreciation later that might result in a total return far in excess of bonds.

But with the 10 year Treasury note currently yielding only 2.53 percent, many blue chip stocks are paying dividend yields that exceed that level with the strong likelihood of increasing those dividends in the years ahead. That being the case, no appreciation at all would be required for those stocks to generate a total return in excess of bonds.

Most of that is fairly obvious, but what most people don’t fully realize is the extent to which the tech sector has become the source of some of the best dividend payers in the market. For example, the ten stocks that comprise our Investments Portfolio pay an average dividend yield of 2.53 percent, coincidentally exactly the same as the 10 year Treasury note!

Of those ten stocks, the top five dividend payers (CA Technologies, Cisco Systems, Intel Corp., Microsoft and Seagate Technology) are yielding 3.16 percent, only slightly less than the 30 year Treasury note at 3.37 percent. So why own bonds when you can get just as much yield (or more) from stocks that hold enormous amounts of cash that they are likely to use to either pay higher dividends in the future and/or repurchase shares to support the share price?

Regardless, a lot of money is still pouring into bonds which is precisely why their yields remain low despite a reduction in the Fed’s Quantitative Easing program. Meanwhile, trading volume on the major U.S. stock exchanges are well below levels from a year or two ago, suggesting that some investors have taken profits and rolled that money back into bonds. That’s fine for now, but they are risking giving some of those profits back if interest rates do begin to rise and bond prices falter.

Our take? In the long run you are better off owning stocks that are trading at earnings multiples below the market average, while paying dividends yields above the 5 year Treasury note (currently 1.59 percent). What temporary pain is felt during the next market downturn should be more than made up for in the form of current dividends and future appreciation once the bond market comes backs into equilibrium with stocks.

NASDAQ Composite Index:                                                                           

Friday, May 30 = 4,242.62                                                       

Year to Date = + 2.4%

Trailing 7 Days = + 1.4%

Trailing 4 Weeks = + 4.1%

PORTFOLIO UPDATE

In next week’s issue of Smart Tech Investor we will take a close look at recent events regarding Apple (NSDQ: AAPL), most of which are quite positive and have catapulted the stock well above $600. In the meantime, some quick updates on other portfolio holdings as follows.

Last Friday, computer software manufacturer CA Technologies (NSDQ: CA) was accused by the federal government of overcharging more than $100 million on contracts over the past eight years. Based on a GSA requirement that vendors give the U.S. government the same sized discounts it offers private sector customers, CA is accused of giving discounts of as much as 90 percent to select private sector customers while offering only a 50 percent discount to government customers. The stock is down 15 percent from highs reached in January as investors await an outcome.

Speaking of federal contracts, Oracle (NSDQ: ORCL) announced last week that it was approved as a provider of a complex cloud services platform that will allow it to bid on secure contracts for federal agencies primarily involved in homeland security.  Oracle is now able to provide services under the Federal Risk and Authorization management Program, which make it the first private vendor eligible to offer Paas (Platform as a Service) contracts combining both private and public cloud resources.

A week ago Intel (NSDQ: INTC) announced it had entered into a strategic partnership with Rockchip to enhance its offerings of chip technology for lower cost Android tablets. Built around Intel’s Atom processor and 3G modem technology, this platform is specifically aimed at first time tablet buyers around the world, especially rapidly growing markets in China and India. Although not immediately accretive to earnings, Intel expects this relationship to begin impacting financial results in the second half of 2015.