Sunday, April 10, 2016

Cash Dividends on Blue Chip Stocks Often Yield More Than the Interest Paid on Bonds

For the past several years, I've argued that for individual savers and investors blue chip dividend paying stocks are much better investments than bonds which pay a fixed amount of interest each year until maturity.

Unlike bonds, these stocks combine greater current cash dividend income with the high probability of periodic future dividend increases.  In addition, there is the likelihood that the price of these stocks will increase several fold over future years as sales and earnings grow.

In contrast, bonds pay a fixed amount of interest and at maturity simply repay the principal amount of the bond.

5 New Picks from 'Stocks Are the New Bonds' Portfolio offers these ideas for individual investors to consider:

"Encouraged that his thesis has worked so well so far, Thomas Lee of Fundstrat Global Advisors updated his report from last November that declared, “Equities are the ‘new bonds’ in 2016.”

A total of 27 out of 30 companies on his list of high quality firms that have dividend yields higher than their corporate bond yields has outperformed the S&P 500 in the last five months.

For “Part Deux,” 50 companies make the list. They have an average dividend yield of 3.6%, compared to a weighted cost of long-term corporate debt of 2.6%.

“Think about this,” Lee writes, “one is getting paid 100bp pre-tax (higher after-tax) to own the equity versus the co’s bond.”

Here are 5 household names that make the new, larger list:
  • Colgate-Palmolive (CL)
  • Boeing (BA)
  • Wells Fargo (WFC)
  • PepsiCo (PEP)
  • Altria (MO)
And here are 5 from the first list that still make the cut:
  • International Business Machines (IBM)
  • Target (TGT)
  • General Electric (GE)
  • Exxon Mobil (XOM)
  • Pfizer (PFE):"
Summing Up

Of those companies cited above, I have long owned shares of Boeing (3.41% dividend yield), Wells Fargo (3.19%), GE (2.99%), Exxon (3.51%) and Pfizer (3.69%).

From time to time, I have also owned shares of several of the other companies mentioned as well.

Interest rates will eventually go up someday, and when they do, the principal value of the bonds outstanding will fall in price. {NOTE: That's because bond values are marked to market and act in Teeter Totter like fashion.  Accordingly, interest rate increases result in bond price decreases.}

Investing in blue chip dividend paying stocks has long been and will continue to be better than owning government bonds.

And over the long run, they'll probably be much safer too.

That's my take.

Thanks. Bob.

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