My thesis for the next 12-24 months and
I recently opined that I thought asset allocation strategies needed to ditch bonds in favor of high dividend stocks. My reasons for suggesting this was that A) the yield on many big mega-cap blue chips (lly, T, VZ, most of big pharma, big tobacco, other telecom) exceeds the yield on bonds of similar stability, B) dividends have tax advantages relative to bonds (except muni bonds), C) the prices of these stocks should go up over time while bonds, presumably, don't have anywhere to go but sideways or down over a long period of time, and D) the dividends can and in most cases will be raised over time while a bond's yield is set once its purchased.
The bond market appears to be fairly well run out. Yields on high quality corporate bonds are extremely low, like 4.25% for a Medtronic with about a 10 year time horizon and so forth. The yields on many stocks are higher and they have the other advantages listed above.
Beyond simple yield, many of the stocks in this category are plain and simplly cheap. My basic thesis for 2010 and maybe 2011 (can change, depending on what happens in the market) is that the apparently run-out bond market will lead to some buoyancy under these big, stable, dividend-paying blue chip stocks. REITs mostly have less yield and, often, less advantageous tax profiles right now, BDCs have higher yields, in general, but are usually just too small for any fund to park a significant amount of money in. The total market cap of the BDC world is probably less than the dollar amount of dividends paid by AT&T annually.
Looking at the highest dividend yields on the S&P 500 (i.e., potential bond substitutes), we find these:
1. FTR (Frontier communications), telecom. 13.4% (but likely to go lower in teh future aafter a deal with verizon is done)
2. Windstream (more telecom), WIN, 9%
3. CTL, Centurytel, more telecom, 8.8%, dividend aristocrat,good coverage
4. MO, altria, big tobacco. 6.9%
5. RAI, Reynolds America, 6.8%, big tobacco
6. Q, Qwest, telecom again, 6.7%
7. T, AT&T, telecom again, 6.6%
8. VZ, Verizon, yes, you guessed it, more telecom, 6.4%
9. Then some utlities and Pitney Bowes, PBI, the only non-tobacco, non-telecom, non-utility anywhere near the top. LLY, BMY make the top 30 from Big Pharma and Dupont and a few others start showing up lower int he list as well.
So from a dividend yield standpoint, Telecom seems to be where its at. If you treat the telecom companies as "utilities", they yield higher than the energy or other utlities.
64 total companies yield more than the 3.7% currently offered by the 10 year treasury.
Many of these companies yield higher than good quality corporate bonds,its possible that some actuallyhave common stock that yields more than their own corporate bonds, which is probably unheard of.
The S&P 500s yield, even with all the dividend cuts (and most financials, a huge part of the index) is still higher relative to the yield on the 10 year than the historical average. Reinstate divi's from financials, etc., and it would be near record levels relative to the yield on the 10 year. AND THIS DESPITE THE FACT THAT AS WE FOUND RECENTLY IN A RECENT THREAD, buybacks are now vastly more common than dividends. In 1980, buybacks were about 10% of dividends, today they are nearly DOUBLE dividends. When viewed from that light, the yield (adding dividends and buybacks) on the S&P relative to treasuries (and, thus, relative to corporate bonds) has never been higher (except whne the market was lower or treasuries were even lower in the last 18 months, of course).
I think this is the largest discrepancy in the market today. The dramatically higher yields available from big stable, boring, low beta blue chips relative to bonds of all kinds.
Carrying on: AT&T has never yielded higher than today (except of course when the price was lower in fall 2008 or the march bottom) since the aftermath of Black Monday. The 10 year was 8% then.
VZ hasn't yielded this high since its dip in 1992. The 10 year was 7% then.
MO hasn't yielded this much since the lawsuit panic in around 2000. (again excepting when prices were lower in the last 18 months).
LLY hasn't yielded htis much since 1982 (again excepting the last 18 months). Even in the big pharma panic in the early/mid 90's its yield never got quite this high.
Steve Leuthold has recently moved alot of money out of bonds and into big boring blue chip stocks due to better yields and lower risk. see here
Something has to give. I don't believe there has been a time since the great depression era when so many stocks yielded so much more than the 10 year or corporate bonds. Or a time when it when several big blue chip stocks yield more than their bonds pay.
Very stable companies with very stable yields and good dividend histories and huge market caps are likely to see some share price buoyancy in the next 6-24 months.
That is my favorite play on the market today. Last year it was a bet on reversal of mark to market accounting-induced trauma in financials.
The question becomes how does one play it? There are a great many options... And what is the time frame in which it happens?
Gun to my head I say these stocks trade (big telecom and tobacco) to 5-5.5%.
I may be back with more later. Please note I am not expecting share prices to double, but I do think Verizon could trade north of $35 and AT&T could trade north of $30, and I think there is something just short of a concrete floor under their share prices from right around where they are today.