BONDS OR DIVIDENDS?
Why Have Investor’s Historically
Preferred Bonds?
– Traditionally known as a “safe investment”
– Typically less volatile than stocks
– Offer regular interest payments
– Have first priority in any liquidation
The Safer Alternative to Bonds. Jim Royal (September, 2011)
Is There Risk With Bonds?
– Types of risks associated with bonds:
Interest rate risk, reinvestment risk, inflation risk,
credit/default risk, rating downgrades and liquidity
risk.
The Safer Alternative to Bonds. Jim Royal (September, 2011)
Trends in Bonds
• Current trends within the bond environment:
• Low interest rates: Interest rates below the level of
inflation, making investors lose purchasing power as bonds
decline in value when rates rise again.
• 100-year bonds: Although these bonds offer higher
interest rates, there is principal and business risk.
• Weak bond covenants: Bond investors may accept weaker
lending terms.
The Safer Alternative to Bonds. Jim Royal (September, 2011)
YIELD OF S&P500 STOCKS vs. 10-YEAR TREASURY YIELD
Source: AAII, July 2017
An Investor in Dividend Stocks or Bonds
Will Have To Deal With Principle
Fluctuations In Either Investment…
So, In This Interest Rate Environment,
Which Would You Rather Own, Dividend
Stocks or Bonds?
**In Both Cases, The Investor Has To Hold The
Investment To Get The Yield.
Average Dividend Yield from Indices,
as of July 2017
Index
Aggregate Value of Index
Components
Aggregate Dividends
Dividend Yield (%)
[S&P and Nasdaq in
millions.
Dow Jones in units.]
[Next four quarters]
[Aggregate Dividends divided by
Aggregate Value]
[S&P and Nasdaq in millions.
Dow Jones in units.]
S&P
[Floating Capitalization Weighted: stock
price and per-share dividend are
multiplied by the number of floating
shares and then scaled to millions.]
Nasdaq 100
[Modified Cap. Weighted: stock price
and per-share dividend are multiplied by
the Nasdaq weight factors and then
scaled to millions.]
Dow Jones
[Price Weighted: Sum of prices and
dividends of stocks in the DJIA index.
(N.B. Divide stock price sum by the DJIA
divisor to get the index value.) ]
20,722,936.087
434,886.490
2.10
8,203,609.800
95,541.068
1.20
3,108.360
78.304
2.52
Indexarb.com, May 31st, 2017
10-Year Treasury Yield
2.29
Yahoo! May 31st, 2017
Historical Comparison: Top 25 Dividend Stocks
Q3-17 vs. 10-Year Treasury Yield
4.06
2.29
Source: Yahoo.com
TOP 25 DIVIDEND PORTFOLIO
PERFORMANCE - % RETURN
Source: Yahoo Finance
What about Corporate Bonds?
CORPORATE BONDS
DIVIDEND STOCKS
• Dividend yields of high quality
equities have risen
Companies with strong balance
sheet and stable earnings will
sustain in an economic downturn
Equities will hold up much better
in an inflationary environment
Current tax rate for qualified
dividends is 15% or 0%
Potential for capital growth
Advantage of possibly raising
current yields over time
• Nominal yields on
Treasuries and corporate
•
bonds have dropped since
recession
•
• Maturity timeline required
• In inflationary environment, •
bonds tend to do poorly.
•
• Bond interest is taxed as
•
high as 35% rate
Seeking Alpha, June 2011
Average yield-to-maturity for
bonds= 3.52%, despite having an
average coupon of 6.42%
Average dividend yield of the same
corporate borrowers is 4.03%
Seeking Alpha, June 2011
Key in a Dividend Strategy
• Search for companies with strong fundamentals
• Select stocks with stable dividend yield and growth
• Unlike the bonds that are difficult to price, stocks are
much easier to price
• Underlying stock offers growth potential
• Reinvest the dividends
• Quarterly screening process for quality dividend
stocks
• Combination of high/low dividend yield, high/low
dividend growth, and payout ratio
As of:
7/1/2017
RANK #
TICKER
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
MIC
BGCP
VLO
LAZ
RAI
KKR
ORI
ENB
CSCO
GIS
GSK
VZ
LYB
RDS.B
IP
MSFT
ABBV
WFC
GM
TEVA
JPM
WMT
CS
KO
GE
COMPANY
Growth Score
Yield Score
Dividend
Yield
TOTAL SCORE
60.0278
57.1944
60.0833
59.4167
61.0833
57.7500
56.6944
53.5000
56.4722
57.1389
53.0556
50.5556
51.9444
46.6111
53.8611
58.5278
49.0278
52.9722
45.1389
44.5278
52.3889
49.0000
38.8056
39.4167
35.2500
95.00
94.00
91.00
88.00
86.00
88.00
89.00
92.00
88.00
87.00
91.00
93.00
91.00
96.00
87.00
79.00
88.00
84.00
91.00
90.00
80.00
83.00
93.00
87.00
88.00
6.80
6.10
4.30
3.60
3.10
3.50
3.90
4.60
3.60
3.40
4.50
5.10
4.50
7.20
3.30
2.20
3.50
2.90
4.40
4.20
2.30
2.70
5.10
3.30
3.50
77.51
75.60
75.54
73.71
73.54
72.88
72.85
72.75
72.24
72.07
72.03
71.78
71.47
71.31
70.43
68.76
68.51
68.49
68.07
67.26
66.19
66.00
65.90
63.21
61.63
Macquarie Infrastructure Corp
BGC Partners, Inc.
Valero Energy Corporation
Lazard Ltd
Reynolds American, Inc.
KKR & Co. L.P.
Old Republic International Cor
Enbridge Inc (USA)
Cisco Systems, Inc.
General Mills, Inc.
GlaxoSmithKline plc (ADR)
Verizon Communications Inc.
LyondellBasell Industries NV
Royal Dutch Shell plc (ADR)
International Paper Co
Microsoft Corporation
AbbVie Inc
Wells Fargo & Co
General Motors Company
Teva Pharmaceutical Industries
JPMorgan Chase & Co.
Wal-Mart Stores Inc
Credit Suisse Group AG (ADR)
The Coca-Cola Co
General Electric Company
Beta
Rf*
0.90
1.25
1.28
1.88
0.44
1.55
1.19
0.61
1.23
0.60
1.04
0.56
1.04
1.10
1.45
1.00
1.54
0.97
1.35
0.49
1.22
0.30
1.37
0.71
1.25
Beta
Current
Portfolio Yield:
Rf
Treasury Bill Rate - 4 weeks
6/29/2017
* Growth and Yield Score based on 3Q/2017 Screening
4.064
0.87
0.87
0.87
0.87
0.87
0.87
0.87
0.87
0.87
0.87
0.87
0.87
0.87
0.87
0.87
0.87
0.87
0.87
0.87
0.87
0.87
0.87
0.87
0.87
0.87
Rf
1.05
0.87
Rm
0.7017
0.7017
0.7017
0.7017
0.7017
0.7017
0.7017
0.7017
0.7017
0.7017
0.7017
0.7017
0.7017
0.7017
0.7017
0.7017
0.7017
0.7017
0.7017
0.7017
0.7017
0.7017
0.7017
0.7017
0.7017
Rm
0.7017
CAPM of Portfolio
Current Portfolio Yield
Expected return of the Portfolio
CAPM
0.7186
0.6597
0.6546
0.5537
0.7960
0.6092
0.6698
0.7674
0.6631
0.7690
0.6950
0.7758
0.6950
0.6849
0.6260
0.7017
0.6109
0.7068
0.6429
0.7876
0.6647
0.8195
0.6395
0.7505
0.6597
CAPM
0.6929% Per Month
8.64%
4.06%
12.70%
Annualized
Capital Asset Pricing Model (CAPM)
•
•
•
A model that describes the relationship between risk and expected return and that is used in the
pricing of risky securities.
General idea behind CAPM: investors need to be compensated in two ways: time value of money and
risk.
– The time value of money is represented by the risk-free (rf) rate in the formula and compensates
the investors for placing money in any investment over a period of time.
– The risk is represented by beta and calculates the amount of compensation the investor needs
for taking on additional risk (risk premium)
The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free
security plus a risk premium.
Investopedia, October 2013
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