10-year T-note v. Dividends
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.