Strategist Lee: These stocks are the new bonds

Traders on the floor of the New York Stock Exchange.
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Traders on the floor of the New York Stock Exchange.

The Wall Street strategist who correctly called the October comeback said a massive reallocation from bonds into equities should keep the rally going into 2016, especially for a particular kind of stock.

A Federal Reserve rate hike next month will be the catalyst for this flight from bonds, said Fundstrat's Thomas Lee on Friday. And it will make dividend stocks the "new bonds," he said.

Despite a six-year bull market, there is still plenty of money left to go into stocks, contends Lee. Since 2007, U.S. households put $2.4 trillion into bonds, while taking $2 trillion out of U.S. equities, according to ICI and Fed data cited by the strategist.

The fundamental driver behind this reallocation back into stocks is the fact that the dividend yield on the S&P 500 is about equal to the yield on a 10-year Treasury. So you get the same payout as a government bond before even accounting for any stock price appreciation.

"The parity in yields is something we have not seen for 50 years — really since the late 50s. There was a short period in the 2011/2012 period where this also existed. And we know stocks did very well subsequently. With inflation and interest rates potentially rising in 2016, we again see this valuation argument for equities as compelling."

Here are Fundstrat's recommended dividend stocks to take advantage of the opportunity...

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