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My thesis for the next 12-24 months and



March 16, 2010 – Comments (12)

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. 



12 Comments – Post Your Own

#1) On March 16, 2010 at 9:50 AM, mrindependent (41.51) wrote:

Great post.  Plus one rec.

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#2) On March 16, 2010 at 10:35 AM, Griffin416 (99.97) wrote:

I agree with your thesis, but not your stocks, given that I wrote something similar in my blog in January, that the market will be much flatter in the next year or so and people should move more money into high yielders.

Please take a look at those high yielding Pimco and Blackrock things, DVF, PHK, PTY, PCN, AWF, PFL, NOX, PGP, etc. (my best performers over the last 3 months up 10-20 caps points.)

Additionally, Cramer and the rest of the pundits are crying about people putting money into bonds funds. TV people do not know what they are talking about. I have 25% of my dough here, I live in NYC so my taxes are sky bond fund yield 6.6% triple tax free. That is equivelant to 10% in stock do you beat that while you are sleeping?

I have been burned with T pretty badly, holding it for the yield over time (recently) has lost you money. I had a AAPL thesis for it, but the death of the land line was too powerful. I'd rather have half my money in high yielding assets as stated above and half in cyclical/ secular stuff with low yields. My real portfolio has 4.1% yield, creaming the 10-year and the S&P yields

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#3) On March 16, 2010 at 12:32 PM, awallejr (50.90) wrote:

Don't forget about MLPs.  Yield and tax advantage.

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#4) On March 16, 2010 at 7:19 PM, checklist34 (98.92) wrote:

Awall, how are MLPs tax advantageous?  I wasn't aware of that.

And my thesis is exclusive to small cap stocks or anything that is really boring and stable.  I suggest that big money asset allocation will buoy extremely boring blue chips with high yields.  And I have a couple ideas on how to play it.  

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#5) On March 16, 2010 at 7:27 PM, checklist34 (98.92) wrote:


     DVF invests "primarily in floating rate debt securities and instruments" per yahoo finance.  Sounds like interest-rate sensitive things that are probably not yielding too well on a risk/reward basis.

    PHK is a debt/bond fund.  PTY is a bond fund....

    What I am saying is that bonds are the last place you want to be over any meaningful period of time for these reasons

1.  the yields are incredibly low

2.  interest rates are at all time record lows

3.  bonds are arguable in "bubble" territory, have had a 25-30 year bull market, and in light of 1 and 2 above its basically done IMO.  Muni's at some yields will remain attractive and a few here and there but by and large...

Big money, like the guys running those funds, is going to gravitate towards equities of the largest, most boring sort.

This will create buoyance under the most boring stocks.  I DO NOT ANTICIPATE LARGE INCREASES IN PRICE PER SHARE, but there's a play here that I've been working on for a week that I think has some fantastic risk/reward.


my hypothesis:  bonds are largely done (doesn't mean they have to crash), the risk in bonds is simply too high (inflation risk, interest rate risk, opportunity cost of holding them), and ...

... the stocks that are closest to bonds will, as a result of all these things, see some buoyancy in the share prices, some reduction in yield.

AT&T to 40?  Doubtful.  But to 30...  VZ to 35.  MO to 23.

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#6) On March 16, 2010 at 7:59 PM, checklist34 (98.92) wrote:

And more important than my thesis that these shares could appreciate mildly...

I think having their yields superior to bonds will basically build a floor under the share prices where they are.  I think T at 25-26 and VZ at 30ish and MO at 20ish are about floors going forward, barring some dramatic tank in the market (or maybe even then).

Call spreads and put call combinations are what I have in mind.  The options in these things are reasonably liquid...

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#7) On March 16, 2010 at 9:04 PM, robstuck (< 20) wrote:


i completely agree as far as bonds are concerned. states, cities, nations, and companies will soon be competing to service their debt. Over the past 5 years the US has had terrible monetary and fiscal policies running up billions in debt, with february setting a US record with regard to monthly deficit. the bond market has unduly rewarded US treasuries. this needs to be reversed.

i like shorting treasuries with a small portion of risky money, and betting on big dividend blue chips like you mentioned.

could use explain how to use options to hedge risk with regard to these plays? I have no experience using them but have heard much talk about using them to play insurance companies recently.

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#8) On March 16, 2010 at 9:54 PM, Tastylunch (28.62) wrote:

MLPs and Taxes-

Tax implications for MLPs differ significantly from corporations for both the company and its investors. Like other limited partnerships, there is no tax at the company level. This effectively lowers an MLP's cost of capital, as it does not suffer the problem of double taxation on dividends. Companies that are eligible to become MLPs have a strong incentive to do so because it means a cost advantage over their incorporated peers.

In an MLP, instead of paying a corporate income tax, the tax liability of the entity is passed on to its unitholders. Once a year, each investor receives a K-1 statement (similar to a
1099-DIV form) detailing his or her share of the partnership's net income, which is then taxed at the investor's individual tax rate.

One important distinction must be made here: While the MLP's income is passed through to its investors for tax purposes, the actual cash distributions made to unitholders have little to do with the firm's income. Instead, cash distributions are based on the MLP's
distributable cash flow (DCF), similar to free cash flow (FCF). Unlike dividends, these distributions are not taxed when they are received; instead, they are considered reductions in the investment's cost basis and create a tax liability that is deferred until the MLP is sold.

Fortunately for investors, MLPs generally have much higher distributable cash flow than they have taxable income. This is a result of significant
depreciation and other tax deductions, and is especially true of natural gas and oil pipeline and storage companies, which are the most common businesses to choose an MLP structure. Investors then receive higher cash payments than the amount upon which they are taxed, creating an efficient means of tax deferral. According to a report by Wachovia Securities, titled "Master Limited Partnerships: A Primer" (2003), the taxable income passed on to investors often is only 10-20% of the cash distribution, while the other 80-90% is deemed a return of capital and subtracted from the original cost basis of the initial investment.

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#9) On March 16, 2010 at 10:08 PM, BurntTiger (< 20) wrote:

If my tax bracket is in the lower 2 does that make a differnce?  If the investment is never sold how does that work?  Im sure you cant defer taxes forever.  thanks in advance for awnsering my rookie questions

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#10) On March 16, 2010 at 11:25 PM, Tastylunch (28.62) wrote:


AFAIK (and I should note I am not in any way shape or form an accountant or tax attorney so please double check anything I say. Alos I have a personal  accountant to do my taxes so I may be mistaken)

If my tax bracket is in the lower 2 does that make a differnce?

only when you actually sell the MLP.

If the investment is never sold how does that work?

you pay zero taxes until you do sell it is my understanding. which is why you should hold it in a regular account. It cna complicate things in an IRA when you do sell.

Im sure you cant defer taxes forever.

That depends on the gov't. if you never sell  though you never ahve to pay capital gains taxes and if you own a MLP there is no dividend tax so theoretically you could could never pay taxes on it provided that you never sell it.

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#11) On March 16, 2010 at 11:45 PM, awallejr (50.90) wrote:

Tasty answered your question Chk.  The K-1s are a pain but eventually you get used to them.  I often mentioned a few like PVR, EVEP, LINE. EEP. MMLP even BBEP.  They have appreciated nicely since the March lows but some still have decent yields.  There are plenty others, mainly in the energy pipeline sectors. 

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#12) On March 23, 2010 at 1:27 PM, sentinelbrit (55.47) wrote:

Nice post! I don't own any bonds. Over the long term dividends have provided a good proportion of total returns in stocks. It's nice to see income coming into my portfolio but most of my holdings are owned for capital gains and I intend to hold for longer than a year.

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