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September 24, 2012 – Comments (3)

Another in the series of stocks vs treasuries.  This time, the stock team was pulled from S&P's Dividend Aristocrats index - stocks in the S&P 500 with at least a 25-year history of annual dividend raises.  Then it was stocks against the 10-year T-note in a discounted cash flow model.  I was a little surprised to see that only one utility, Con Ed (ED), was in the 51 stocks making up the index.  Not surprising to learn consumer staples had more members than any other sector.

Income investors are being pushed into lower quality corporates, international paper and equities to get decent yield.  All of those are considered to be higher risk than US Treasuries.  But, I think this type of analysis shows the premium for those 'safe' Ts is pretty steep - and if/when inflation picks up a bit, it won't look like longer term Ts were really all that safe.  

I continue to believe the Treasury market prices / yields aren't providing any cushion against inflation risk.  In every one of these I've done, the 10-year T yield has been near or below the published inflation rate.  That's not as bad a bargain as the negative interest rate on German 2-year bunds earlier this year - yep, people actually paid Germany to hold their money for two years.

In case anyone's interested in why some of the higher yielding stocks in the index weren't on the team, it's because I arbitrarily excluded anything with a payout ratio over 80%.  Also tossed Pitney Bowes (PBI) because of a highly leveraged balance sheet along with a valuation and double-digit yield that seemed to be screaming 'value trap.'

As always, comments or questions are welcome here or at the article.

Fool on!

Russ

Disclosure:  No position in any stock mentioned.

3 Comments – Post Your Own

#1) On September 24, 2012 at 10:44 PM, awallejr (83.78) wrote:

I like the diversity of your picks.  I was wondering what energy play there was.  I would probably switch out GPC with it.

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#2) On September 25, 2012 at 3:49 PM, rd80 (98.50) wrote:

Thanks for the comment.

The lone energy stock in the index is XOM. 

I think Chevron is knocking on the door of a 25-year string and should be joining the club shortly.

Long CVX and I like its higher yield a little better than XOM. 

I would think there are some MLPs with pretty impressive dividend growth history out there as well, but unless they get classed in a sector other than energy, there aren't any in the index.

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#3) On September 25, 2012 at 6:36 PM, awallejr (83.78) wrote:

Cvx is a good choice.  Doubt MLPs will show up on your screen because technically they give distributions not dividends.  Not sure if that does matter or not.

I have been hearing more and more pundits starting to suggest MLPs.  I really do think they make a great alternative to bonds for the retiring crowd.

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