Why You Can Do Better Than Bonds
By Sara Nunnally, Editor, Smart Investing Daily
The U.S. 10-Year Treasury bond is a safe investment… right? For the most part, yes. The U.S. government — for all its flaws — is not likely to go bust tomorrow.
But yields have been sliding for nearly 30 years, and we haven’t yet seen the bottom. At the same time, bond prices have been climbing in near bubble-like fashion. That means investors are spending more for a lower yield, all in the name of safety.
Yesterday, Bloomberg reported, “Goldman Sachs Group Inc. economist Sven Jari Stehn says the Fed could buy ‘at least’ $1 trillion in Treasury notes, and ‘sizeable purchases of Treasury securities’ will begin later this year or early next year.”
So yields could continue to drop through the rest of the year, and maybe even into next year.
Now, bonds play a part in any balanced investment portfolio, but if you’re looking for steady extra income, you can do better.
Much better.
As of midday yesterday, the yield on a 10-Year Treasury note was 2.69%. But the annual dividend yield for AT&T, Inc. (T:NYSE) is 6%! That’s an extra $1.68 a share…
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Investors looking for value in the stock market sometimes discard companies that offer regular dividends. In many cases, these investors would rather see that cash pumped back into the company.
But dividend stocks, over the long term, have outperformed non-paying stocks. According to Ned Davis Research and Income Stock Report, “dividend stocks on the S&P 500 generated a total return of 10.19% per year compared to the 4.39% generated from non-dividend stocks” over the past 30 years through November 2009.
And the difference between the two has been widening over the past couple years.
That could mean that in times of economic uncertainty, dividend-paying stocks are a better choice for all types of investors. When you’re looking for steady gains in the stock market, rather than the fast appreciation of a company’s share price, dividend-paying companies shine all the more.
Dividends can help you determine the fundamental health of the company, because dividends are paid to investors from “leftover” earnings.
A company paying regular dividends, even in a bearish market climate, is ensuring investor confidence, and lowering volatility. This is because investors tend to hold dividend-paying stocks through bear markets, according to Bloomberg Businessweek.
So not only do dividend-paying stocks take some volatility out of your investment portfolio, but these companies pay you money for being an investor…
A Peek Behind the Dividend Yield Curtain
Dividend yield is calculated by dividing the annual dividend per share by the stock’s share price. Simple enough, right? By this calculation, the higher the yield, the more attractive the dividend stock.
But let’s take a closer look at this equation.
Let’s assume that Company X, which is trading for $20 a share, keeps its dividend, of $1.00 annually, steady as the market turns against it. At this point, the annual dividend yield is 5%. If Company X’s share price falls to $15, the annual dividend yield becomes 6.67%.
The dividend is still $1 a share… The difference is that Company X has dropped in share price. In other words, a high dividend yield isn’t the only thing you should look for in a dividend-paying company.
(Do you like my breakdown on dividend stocks? Sign up for Smart Investing Daily and let me and my fellow editor Jared Levy simplify the stock market for you with our easy-to-understand investment articles.)
Forbes has compiled a list of the top 10 dividend-yielding stocks from the Dow Jones Industrial Average.
You can find the list here, but besides the companies listed, take a look at the other parameters Forbes took into consideration:
- Price-to-Earnings Ratio
- Price-to-Book Ratio
- Free Cash Flow
- Market Cap
- Profit Margin
- Revenue
Notice anything about this list? The first three are the same key statistics we used on Friday, Sept. 3, to determine value in a cheap market.
And lastly, take a look at the company’s share price.
Let’s take AT&T, for example…
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Great Value, Great Dividend
Here are the statistics:
| | AT&T, Inc (T:NYSE) | Verizon (VZ:NYSE) |
1. Price/Earnings
2. Price/Book
3. Debt/Equity
4. Free Cash Flow
5. PEG Ratio
** 52-Week Price Change
** Dividend Yield | 13.10
1.60
0.59
$13.41 Billion
1.89
5.28%
6.00% | 119.44
2.23
0.66
$17.49 Billion
2.27
-0.55%
6.30% |
This is a comparison of AT&T and Verizon. As you can see, both companies offer a great dividend yield.
But AT&T is clearly the better value with a much lower P/E ratio, lower Debt-to-Equity ratio, and lower PEG ratio. Now look at the difference in each company’s share price over the past year. AT&T has climbed more than 5%, while Verizon is slightly under par for the past 52 weeks.
That means had you invested in AT&T a year ago, you’d be sitting on a gain of 11.87%, much better than the 10-Year Treasury bond.
But even if AT&T hadn’t made any share price gains over the past year, you’d still be raking in 6% from that dividend… more than double the T-bond’s 2.69%. In fact, AT&T could have dropped to $25.60 in a year, and you would’ve still come out ahead of the Treasury’s yield.
The long and short of all this is that you can do much better that the declining yield in government bonds. High-yielding dividends can even help eliminate some downside risk of investing in stocks. If you add dividend stocks to your value criteria, the combination can really pay off, as it has for AT&T over the past year.
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About the Author
Sara is Co-Editor of Smart Investing Daily. As Senior Research Director and global correspondent, Sara Nunnally’s diverse resume includes studies in art history, computer science and financial research. She has appeared on news media such as Forbes on Fox, Fox News Live, and CNBC’s Squawk Box, as well as numerous radio shows around the country.
As Senior Research Director, global correspondent and co-editor of Smart Investing Daily, Sara has traveled all over the world in search of the best investment opportunities to recommend to her readers, be they in developed economies like France and Italy, in emerging markets like the Czech Republic and Poland, or in frontier terrain like Vietnam and Morocco. Her unique “holistic” approach of boots-on-the-ground research has given her an edge in today’s financial marketplace as she searches for the next investment opportunities in hot sectors like alternative energy, currency markets and commodities.
