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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...

Charlie
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Hey Charlie,

Bit late to this party.

If he wants to compare junk to equity this way then it is he that is being disingenuous because included in that JNK's"7%" is YTM not simply coupon payments and he is actually comparing a fund to a vague dividend paying stock.

So lets make a more total yield to total yield comparison and use earnings yield to take a sniff at equities. Since the author used JNK lets use SPY, broad asset fund to broad asset fund. SPY price = 158.67, earnings 31.03 = 19.56%.

Where the author is absolutely correct is that there is a different risk profile between bonds, even junk, and equities. Equities, just like JNK, have no maturity their risk is open ended. Both bonds and equities can go to zero. If an equity goes to zero there will be no workout.

Now some very smart people, long ago, decided that a p/e of 8 was/is a good mean average p/e to use when estimating if a stock may have value in it. Currently this 158 SPY price is a p/e of 5, if we revert it to this mean of 8 we get 248.24. A 60% return. Now there are no guarantees this investment will cough up a 19.5% or 60% return but that is the upside that you are taking on for accepting a 2% SPY dividend yield and a 7% JNK dividend yield.

How much risk are you taking on for that upside? Is it worth the risk?

Apparently the author feels that some divi stocks are worth it
This doesn't mean that yield-seekers should stay clear of stocks. In fact, our portfolio at Miller's Money Forever has plenty of dividend-paying stocks.

jack
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Jack,

How well does 'Earnings Yield' spend at the grocery store?

Charlie
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