The Motley Fool Discussion Boards
Investing/Strategies / Bonds & Fixed Income Investments
|Subject: Div Stocks vs. Bonds||Date: 3/19/2013 6:57 PM|
|Author: globalist2013||Number: 34835 of 35367|
Vedran Vuk writes a scathing critique of div stocks. http://www.caseyresearch.com/cdd/fraud-financial-markets-are... His argument goes like this:
Many pundits are saying that it's pointless to buy a bond at 2% when you get yields on dividend-paying stocks yielding 3%. Their suggestions are a bit disingenuous, because bonds and equities are distinctly different asset classes. If this were an apples-to-apples comparison, 3% definitely is better than 2%. However, instead we're comparing apples to oranges - they're both round fruits, but the similarities don't go much further. Same goes with bonds and equities - they both pay yields, but their risks are very different.
…the way dividend-yielding stocks are often advertised ignores the most likely comparisons in the bond world. A US Treasury paying 2% is not a good benchmark for a 3% dividend-yielding stock. The risks are nothing alike. If we were to make a comparison with a bond, it should be to bonds with market risk. Yes, such a comparison does exist; they're called junk bonds.
If the stock market tanks, a portfolio of junk bonds will go down with it. Essentially, junk bonds have market risk very similar to equities. So here's a novel idea: Since junk bonds and equities have similar risks, why not compare their yields instead of making a comparison to Treasuries? The junk bond fund JNK currently pays almost a 7% yield. That crushes the 3% on the dividend-yielding stock - meaning that the yield on the stock is actually not compensating you for the risk.
I haven’t checked his math, nor what the current-yield on junk bond funds might be. I just know, long ago, I figured out how --on a risk-adjusted basis -- to pull better total money out of the bond market than nearly any stock investor ever achieves for her or himself from div stocks and, often enough, I could also make better absolute total returns than they ever do. The secret isn’t to load up on junk, but to do what Ben Graham says to do "...buy at a sufficient discount to intrinsic-value to create margin of safety." That’s what produces both cap-gains and a decent income-stream that has some downside-protection (that div stocks don’t).
Vuk’s whole article (the second one down on the linked page) is worth reading, as is nearly everything he writes for Casey Research. http://www.caseyresearch.com/cdd/fraud-financial-markets-are...
|Copyright 1996-2014 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us|