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10-year T-note v. Dividends



June 04, 2012 – Comments (8) | RELATED TICKERS: MKC , SO , RPM

In one corner, the 10-year Treasury with its anemic yield.  Across the ring, five dividend paying stocks.  The contest?  A ten year discounted cash flow with the following rules:

   - Treasury yield is rounded to 1.5%, and the notes return full face value at maturity.
   - Stocks start with their current dividend rate and raise the payment each year in the same quarter as the past several years.
   - To be conservative, dividend hikes are assumed to be only 75% of the past five years' compound annual growth rate.
   - To be conservative, stock prices are assumed to be unchanged at the end of 10 years.
   - Future values are discounted at the most recent consumer price index rate reported by the Bureau of Labor Statistics, 2.3%.

It wasn't close.  For the lowest scoring stock to lose as much purchasing value as the Treasury note, its dividend growth rate going forward would need to be less than 25% of the CAGR for the last five years and the stock would need to trade more than 10% lower ten years from now.

That might happen.  But, my money's on the stocks - literally in three of the cases.

HarryCarysGhost - KO was in the mix this time.

I'd appreciate any feedback on the article. If it's something you'd like to see more of, feel free to toss out ideas for stocks to run or different sets of assumptions to try.

I like the format even tho' there are a lot of uncertanties on the stock side.  The big benefit I see to running the comparison with a coupons vs dividends cash flow analysis is it's easy to run 'what ifs' to get an idea of how far off assumptions would need to be before the answer changes.

Fool on!





8 Comments – Post Your Own

#1) On June 05, 2012 at 3:06 AM, APJ4RealHoldings (37.53) wrote:

"To be conservative, stock prices are assumed to be unchanged at the end of 10 years."


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#2) On June 05, 2012 at 1:05 PM, Valyooo (34.27) wrote:

I would never buy treasuries over stocks unless yields were absurdly high.  That being said they are not really that comparable.  Some stocks go out of business, some drop by 50% because the business changes, some drop by 50% because they were overvalued, etc.  You buy treasuries for safety of principal not for real growth.

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#3) On June 05, 2012 at 3:10 PM, anchak (99.89) wrote:

Russ...Southern is on my list too....


But I would personally do this by universes - eg Dow30, Sp100 and SP500 -

mainly due to sustainability of these being going conerns over the horizon - ie same thing Valyoo said.

They need to be around to pay the dividend

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#4) On June 05, 2012 at 3:11 PM, anchak (99.89) wrote:

Not that I am saying Dow or SP100 companies cant go kaput - but those require some untoward circumstances - at least in the past

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#5) On June 05, 2012 at 7:15 PM, rd80 (94.78) wrote:

Thanks for the comments

You buy treasuries for safety of principal not for real growth.

Folks used to buy treasuries for income and safety.  I think t's fail in both areas today.  Granted holding to maturity gets the money back, but anyone buying a 10-year today runs a huge risk of spending several years with a choice between sitting on an investment that's dribbling out 1.5% while the market has moved to 4, 5 or more or selling at a big loss to move into something better.

 But I would personally do this by universes - eg Dow30, Sp100 and SP500

I like it! Thanks for the idea.

 They need to be around to pay the dividend

Definitely.  Maybe I should have been clearer that the stock picking needs to emphasize businesses with staying power, strong balance sheets and conservative payout ratios.


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#6) On June 05, 2012 at 9:03 PM, HarryCaraysGhost (87.66) wrote:

Hi Russ, much thanks for including KO. I really appreciate that, and the shout out.

KO's the only stock I've been investing in for almost a year now. Just sending in a $150 check every quarter (unless bills get in the way which has happened :(

So by DCA and DRIP'in I'm pretty pleased with my choice. It should handidly beat a ten yr bond (and the S&P for that matter) by multiple degrees.

If I were to pick an energy stock Southern would be high on my list also.


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#7) On June 06, 2012 at 1:45 PM, rfaramir (28.64) wrote:

I wouldn't buy governmet bonds out of principle, not just because they don't preserve principal anymore: "Don't Buy Government Bonds" (

But as for the article itself, it is excellent. It's hard to argue with such results with such extremely conservative assumptions. There have been very few 10-year periods where bonds were better than stocks, so assuming 0% price appreciation is very safe.

It would be interesting to see the results with just normally conservative assumptions, say, price appreciation at just 50% of their last 50-year average and dividend growth also at half their past average.

Also, how bad would the stock price depreciation have to be to make bonds a better deal? You mention McCormick would have to lose 10%, but what about the others? This would reveal how ridiculously depressed bond buyers' stock market expectations really are and would show just how bad a deal bonds are compared to stocks (not just versus one stock). And to make matters worse (for fearful bond buyers), do the same for my less-extreme conservative assumptions suggested above. It might make bond buyers think twice, at least. Do they really think stocks will lose that much value over 10 years?

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#8) On June 07, 2012 at 8:05 PM, rd80 (94.78) wrote:

rfaramir - Thanks for the comment, kind words and article link.  I had to go back about half-way through the first paragraph before I realized it was written in 1962.

I like the idea of including different assumptions, maybe a base case, pessimistic and optimistic or going deeper into how bad the stock assumptions would need to be for the bonds to win.

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