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Stocks on sale for income investors?

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November 21, 2007 – Comments (5)

This morning, US treasury bond yields were about 4% for the 10-year, 3% for the 2-year.  A while back, I did a quick analysis comparing the long term income stream from bonds to a portfolio of dividend paying stocks.  At that time, it took 5-years for the model’s dividend income stream to catch up with the bonds.  Since then, stock prices have fallen, raising their dividend yield and bond prices are up, reducing their yield.  At this point, there is very little difference between bond yields and the dividend yield of some quality companies.  For an investor with a taxable account, the after-tax yield on many dividend paying stocks would exceed the yield on treasuries.

For example, the yields on some of the dividend payers in my CAPS portfolio as of market close on 20 Nov:

BUD – 2.7%
RPM – 4.2%
T – 3.8%
WFC – 4.1%
UL – 2.7%
DEO – 3.7%

Some of these stocks are down for a reason – about 10% of RPM’s income is dependent on residential construction and there’s uncertainty over how much exposure WFC has to bad mortgages.  This list isn’t meant to be all inclusive or a recommended buy list, only examples of good companies with dividend yields near or above bond rates.  I’m sure there are many other examples.

I have no clue if we’re near a bottom in these stocks.  But, the market has discounted dividend paying stocks relative to US treasuries and, IMHO, income investors should be looking at stocks as a good alternative to bonds.  I wouldn't back up the truck, but I believe it's a good time to accumulate some good divvy payers.  At a minimum, the dividends should help cushion any fall relative to the overall market.

I’m curious what the rest of Fooldom thinks.  Is this a good time to start looking at dividend paying stocks?  What other income stocks do you like here?

CAPS notes:
I’ve been busy with work and playing in the Strategy Lab Open lately and haven’t had time to blog much.  Somewhere along the line, my stock pitches collected over 100 recs and 29 Fools have picked me as a favorite.  Many thanks to all who are part of either group.  The positive feedback is appreciated.

Fool On!

Russ

5 Comments – Post Your Own

#1) On November 21, 2007 at 3:53 PM, StockSpreadsheet (72.04) wrote:

I always look at dividend paying stocks in any market.  Dividend yield is one of the selection criteria in my spreadsheet.  I think that dividend yield says a lot of positive things about a company, (they usually actually have earnings if they are paying a dividend, they are being reasonably prudent with their money if they can afford to pay the dividend, etc.).  I will look at and do buy stocks that don't pay a dividend, but it is an extra hurdle they must overcome to be ranked higher on my spreadsheet than a dividend paying stock.

Right now on my spreadsheet, some highly ranked stocks that pay decent dividends are MCGC, ACAS, CT and BPT.  These are not recommendations to buy, but I think they would be worth you looking into if you are looking for good dividend paying stocks.  There might be some big skeletons in the closets of these stocks, and may not be worth putting real money into, but I think they are worth a look.  That is just my opinion though.

Congratulations on your increase in recs and groupies.  Keep up the good work.  Take care and have a happy Thanksgiving.  May all your picks be winners.

Craig 

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#2) On November 21, 2007 at 4:10 PM, StockSpreadsheet (72.04) wrote:

I always look at dividend paying stocks in any market.  Dividend yield is one of the selection criteria in my spreadsheet.  I think that dividend yield says a lot of positive things about a company, (they usually actually have earnings if they are paying a dividend, they are being reasonably prudent with their money if they can afford to pay the dividend, etc.).  I will look at and do buy stocks that don't pay a dividend, but it is an extra hurdle they must overcome to be ranked higher on my spreadsheet than a dividend paying stock.

Right now on my spreadsheet, some highly ranked stocks that pay decent dividends are MCGC, ACAS, CT and BPT.  These are not recommendations to buy, but I think they would be worth you looking into if you are looking for good dividend paying stocks.  There might be some big skeletons in the closets of these stocks, and may not be worth putting real money into, but I think they are worth a look.  That is just my opinion though.

Congratulations on your increase in recs and groupies.  Keep up the good work.  Take care and have a happy Thanksgiving.  May all your picks be winners.

Craig 

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#3) On November 21, 2007 at 5:27 PM, rd80 (98.05) wrote:

Hey Craig,

Thanks for the comment(s) and the leads.  And congrats on getting that 'TMF' handle on your user name.

Happy Thanksgiving to you as well.

Russ

 

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#4) On November 25, 2007 at 5:01 AM, ikkyu2 (99.28) wrote:

I bought some Altria (MO) about a month ago, right before the bottom fell out of the S+P.  MO weathered this without even a hint of a downtick.  The dividend yield is a little over 4% now, and they have never cut it (unless you count the KFT spinoff; the dividends attributable to KFT were paid out via the KFT stock and so MO's dividend technically fell.)

MO is getting ready to split into Philip Morris domestic and Philip Morris international, and there's some uncertainty about how the capital structure of these companies is going to be split up and what is going to become of certain fixed assets.  So there are risks related to that transaction, as well as flat domestic market share, unfavorable currency exchange rates impairing competitiveness in foreign markets, litigation (foreign and domestic), public health campaigns against smoking (foreign and domestic), etc.  Also, it's arguably an evil company profiting off highly addictive poisonous products.  Not everyone wants to invest in that.

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#5) On December 04, 2007 at 6:29 PM, Gtrinvestor (99.76) wrote:

Russ -

Good points, especially b/c the lower rate environment has a 2 fold effect... making dividends higher due to more earnings hitting the bottom line (b/c they pay less in interest expense on their debt), and making their dividends more attractive relative to the falling treasury yields.

I think I will focus on these attributes a little more going forward on some of my CAPS picks, especially as rates will fall further w/ the rate cuts to come.

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