Why Have Investor s Historically Preferred Bonds?

Transcription

1 BONDS OR DIVIDENDS?

2 Why Have Investor s Historically Preferred Bonds? Traditionally known as a safe investment Typically less volatile than stocks Offer regular interest payments Have first priority in any liquidation The Safer Alternative to Bonds. Jim Royal (September, 2011)

3 Is There Risk With Bonds? Types of risks associated with bonds: Interest rate risk, reinvestment risk, inflation risk, credit/default risk, rating downgrades and liquidity risk. The Safer Alternative to Bonds. Jim Royal (September, 2011)

4 Trends in Bonds Current trends within the bond environment: Low interest rates: Interest rates below the level of inflation, making investors lose purchasing power as bonds decline in value when rates rise again. 100-year bonds: Although these bonds offer higher interest rates, there is principal and business risk. Weak bond covenants: Bond investors may accept weaker lending terms. The Safer Alternative to Bonds. Jim Royal (September, 2011)

5 YIELD OF S&P500 STOCKS vs. 10-YEAR TREASURY YIELD Source: AAII, October 2017

6 An Investor in Dividend Stocks or Bonds Will Have To Deal With Principle Fluctuations In Either Investment So, In This Interest Rate Environment, Which Would You Rather Own, Dividend Stocks or Bonds? **In Both Cases, The Investor Has To Hold The Investment To Get The Yield.

7 Average Dividend Yield from Indices, as of October 2017 Index Aggregate Value of Index Components Aggregate Dividends Dividend Yield (%) S&P [Floating Capitalization Weighted: stock price and per-share dividend are multiplied by the number of floating shares and then scaled to millions.] Nasdaq 100 [Modified Cap. Weighted: stock price and per-share dividend are multiplied by the Nasdaq weight factors and then scaled to millions.] Dow Jones [Price Weighted: Sum of prices and dividends of stocks in the DJIA index. (N.B. Divide stock price sum by the DJIA divisor to get the index value.) ] [S&P and Nasdaq in millions. Dow Jones in units.] [Next four quarters] [S&P and Nasdaq in millions. Dow Jones in units.] [Aggregate Dividends divided by Aggregate Value] 21,523, , ,472, , , Indexarb.com, October 2 nd, 2017

8 10-Year Treasury Yield Yahoo! August 31 st, 2017

9 Historical Comparison: Top 25 Dividend Stocks Q4-17 vs. 10-Year Treasury Yield Source: Yahoo.com

10 TOP 25 DIVIDEND PORTFOLIO PERFORMANCE - % RETURN Source: Yahoo Finance

11 What about Corporate Bonds? CORPORATE BONDS Nominal yields on Treasuries and corporate bonds have dropped since recession Maturity timeline required In inflationary environment, bonds tend to do poorly. Bond interest is taxed as high as 35% rate DIVIDEND STOCKS Dividend yields of high quality equities have risen Companies with strong balance sheet and stable earnings will sustain in an economic downturn Equities will hold up much better in an inflationary environment Current tax rate for qualified dividends is 15% or 0% Potential for capital growth Advantage of possibly raising current yields over time Seeking Alpha, June 2011

12 Average yield-to-maturity for bonds= 3.52%, despite having an average coupon of 6.42% Average dividend yield of the same corporate borrowers is 4.03% Seeking Alpha, June 2011

13 Key in a Dividend Strategy Search for companies with strong fundamentals Select stocks with stable dividend yield and growth Unlike the bonds that are difficult to price, stocks are much easier to price Underlying stock offers growth potential Reinvest the dividends Quarterly screening process for quality dividend stocks Combination of high/low dividend yield, high/low dividend growth, and payout ratio

14 As of: 10/1/2017 RANK # TICKER COMPANY Growth Score Yield Score Dividend Yield TOTAL SCORE Beta Rf* Rm CAPM 1 MAIN Main Street Capital Corporatio MIC Macquarie Infrastructure Corp ENB Enbridge Inc (USA) LAZ Lazard Ltd BGCP BGC Partners, Inc VLO Valero Energy Corporation KKR KKR & Co. L.P CSCO Cisco Systems, Inc BTI British American Tobacco PLC ( ORI Old Republic International Cor LYB LyondellBasell Industries NV VZ Verizon Communications Inc RDS.B Royal Dutch Shell plc (ADR) MSFT Microsoft Corporation GIS General Mills, Inc IP International Paper Co PFE Pfizer Inc KO The Coca-Cola Co IVZ Invesco Ltd ABBV AbbVie Inc GE General Electric Company GM General Motors Company CS Credit Suisse Group AG (ADR) WMT Wal-Mart Stores Inc JPM JPMorgan Chase & Co Beta Rf Rm CAPM Current Portfolio Yield: % Per Month Rf Treasury Bill Rate - 4 weeks 9/28/2017 CAPM of Portfolio 8.33% Annualized Current Portfolio Yield 3.99% * Growth and Yield Score based on 4Q/2017 Screening Expected return of the Portfolio 12.32%

15 Capital Asset Pricing Model (CAPM) A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities. General idea behind CAPM: investors need to be compensated in two ways: time value of money and risk. The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The risk is represented by beta and calculates the amount of compensation the investor needs for taking on additional risk (risk premium) The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. Investopedia, October 2013

16 No strategy can guarantee profit or protect against a loss. Past performance is not indicative of future results.

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