Stocks for Income
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.
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