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Income Rumble - Stocks v Treasuries



January 05, 2012 – Comments (4)

As some may know, I've been negative (and wrong) about long-term Treasuries for some time.  After 10-year T-notes ended '11 as one of the best performering investments, I decided to run some numbers for a Fool article (not a video).

The match-up is the net present value of the investment cash flow from 10-yr Treasuries against four dividend paying stocks.   Since perceived safety is a key point for the government paper, the debt's competitors are the only four U.S. companies with something Treasuries don't have -- a AAA rating from Standard & Poor's.  ADP, Microsoft, ExxonMobil and Johnson & Johnson entered the spreadsheet and it was game on.  All solid companies even if they aren't all my favorites in their industries.  With the brakes on dividend growth rates and share prices flatlined over the next decade, each of the stocks still won handily.

Bottom line - I have no clue what the stock or bond market will do over the next several months, maybe I'll be wrong on bonds a while longer.  However, I don't see any probable scenario where quality, dividend paying stocks underperform long bonds looking out over a decade or so.  Income investors should be giving quality dividend paying stocks a good look before deciding to lock in puny fixed rates on long-term bonds.  I started easing money out of bond funds last year and expect to continue that this year.

Disclosure:  Long JNJ, but no position in any other stock mentioned.

As always, feel free to add a comment or question here or at the article.

Happy New Year!


4 Comments – Post Your Own

#1) On January 05, 2012 at 9:07 PM, HarryCaraysGhost (77.10) wrote:

Hey Russ,

Left a more formal comment on the article, hope you had a nice holiday.

I think I've said this before but I'll say it again-

what's a bond?

Divis crush bonds over time. I know we have an age difference but your screener proved that should not make bonds a more attractive investment.

Kinda wish you had thrown KO into the screener.


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#2) On January 05, 2012 at 9:24 PM, rd80 (96.82) wrote:

I did have a nice holiday, hope your's was mighty fine as well.  Glad I was able to make a quick stop at the Tavern before hitting the road.

Easiest way to describe a bond is it's a slice of the lender's side of a loan.

Most models say I should have around 30-50% in bonds at my age, but everytime I've run a similar drill over the past few years, good divvy stocks make more sense.

KO would be a good choice, but I wanted to stick with the four AAA companies for the article.  I'll toss KO into the spreadsheet and post its results here in a bit.

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#3) On January 05, 2012 at 9:40 PM, rd80 (96.82) wrote:

OK, KO joins the fray.

Current yield 2.7%,  5-yr CAGR div growth 8.68%

Assuming forward div growth at only 75% of the 5-yr history and zip for stock appreciation for 10 years, KO adds 3.5% to purchasing power.
Coke KOs the 10-year note's 11.3% loss of purchasing power.

FWIW, I think crimp on div growth rate and flatlining the stock price for this model are very conservative assumptions.  

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#4) On January 06, 2012 at 5:24 PM, ikkyu2 (98.57) wrote:

"However, I don't see any probable scenario where quality, dividend paying stocks underperform long bonds looking out over a decade or so."

You know, 30 year notes - long bonds - issued in 1981 just finished paying last year.  They paid 15% annually.  30 years of a 15% yield backed by the full faith and credit of the US Gov't trounces anything the market can do, although obviously reinvestment looks much worse if you assume the interest was reinvested in bonds the date it was received.

Could we have 15% interest on T-bonds again?  I don't know.  I can foresee a situation where the US economy tanks so direly that GDP drops for years in a row, and the dollar tanks as well, leading to a situation where the financiers of the American deficit demand a higher premium for perceived risk. But I don't know that that gets us to nominal 15% yield.

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