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There’s a thoughtful post (#155,719) at the Berkshire forum that merits your attention if you’re looking for ways to get a bit of current yield and are indifferent whether the yield comes from stocks or bonds. As the author has constructed the portfolio of div-paying stocks, $200k is put to work across 23 stocks with weightings ranging from 6.9% of the portfolio to 2.3%. Obviously, weightings could be adjusted, and the money put to work could be scaled down. But the portfolio as constructed and its 4% average current yield would be a good place to begin. The author stresses the fact that that the portfolio is not a short-term project. He writes:

What do I recommend doing with these stocks? If you want dividends, I
think you could buy this slate and pretty much forget about them for a
decade. I would not rebalance the portfolio at all---some of these
firms will grow a lot more than others, so you might as well let those
winners grow to a larger fraction of the portfolio over time. Sure,
they will go though periods that they are overvalued or undervalued in
the short term, but it's best and easiest simply to ignore that.

Lastly, the hidden gem of good news: I would speculate that this slate
of stocks will increase in value and price a lot too. I am (foolishly)
forecasting an annual compound return including dividends of over
10%/year for this portfolio in the next decade or so. (in round
numbers, 3-4% dividends and at least 6-7%/year average price growth
rate). The dividends will be a lot steadier than the share prices,
which can be totally ignored. 10% a year might not sound like so much,
but let's look at the S&P index in ten years and see how high a hurdle it was


Attempts to compare the gains from stock versus bonds always generate as many misunderstandings as useful insights. This one won’t be any different, because I begin with this premise: On a risk-adjusted basis, there will be no difference between the two. If you’re getting more return from one, it is because you’re taking on more risk. But the converse is never true. Just because you take on more risk doesn’t mean you will receive more reward. So the “bottom line” becomes: “Can I manage the risks responsibly?” If not, then it behooves one to find an easier game. Thus, for many investors, bonds offer as much risk as they are willing to assume. They would like the higher returns of stocks, but they suspect they can’t manage their risks. So they settle for bond-like returns, which would be something in the range of 7%, rather then the 10% of stocks. But rather than indulge in idle speculation, let’s go shopping the today’s bond market with the same list of names the author used to put together his stock list and see how well we could do in terms of obtaining some yield. Below is his list of companies:

GE Santander Wells Conoco Sanofi KraftTakeda Eaton Ingersoll Norfolk
Johnson American Express Proctor Royal Bank of Canada Coca Glaxo
Nestle Tesco Colgate Posco Diageo Burlington Toyota.


Not all of those companies have currently-offered bonds. E.g., Nestle’s bonds are unavailable. But I know they issue bonds, because I own some. Ditto Tesco, Royal Bank of Canada, Posco, etc. Right now, they aren’t available in the secondary market. Arbitrarily, let’s use 3% as the lower boundary for YTM and then ask what the yield-curve for each company would be. Let’s begin with Diageo (A3/A-).

Issue Cpn Maturity YTM Price CY
DIAGEO CAP PLC 5.200 01/30/13 3.4 105.850 4.9
DIAGEO FIN BV 5.500 04/01/13 3.5 106.804 5.2
DIAGEO CAP PLC 7.375 01/15/14 3.6 115.772 6.4
DIAGEO FIN BV 5.300 10/28/15 4.1 106.782 5.0
DIAGEO CAP PLC 5.500 09/30/16 4.7 104.632 5.3
DIAGEO CAP PLC 5.750 10/23/17 4.7 106.868 5.4
DIAGEO CAP PLC 5.875 09/30/36 5.2 109.512 5.4

Toyota (Aa1/AA+) has a single, currently-offered issue.
6.050 06/20/31 6.047

Ingersoll (Baa1/BBB+) has two:

Issue Coupon Maturity YTM Price Cur Yld
INGERSOLL-RAND GLOBAL HLDG CO 9.50 4/15/2014 6.3 113.100 8.4
INGERSOLL-RAND CO 4.75 5/15/2015 5.0 98.841 4.8


Wells (various ratings) has lots of maturities to choose from:

Issue Cpn Maturity YTM Price Cur Yld
WELLS FARGO & CO A2 A+ 6.38 08/01/11 3.5 105.724 6.0
WELLS FARGO FINL INC A1 AA- 6.13 04/18/12 3.5 106.896 5.7
WELLS FARGO FINL INC A1 AA- 5.50 08/01/12 3.7 105.123 5.2
WELLS FARGO & CO NEW A2 A+ 5.13 09/01/12 3.6 104.518 4.9
WELLS FARGO & CO NEW A1 AA- 5.25 10/23/12 3.8 104.480 5.0
WELLS FARGO & CO NEW A1 AA- 4.38 01/31/13 3.7 102.064 4.3
WELLS FARGO & CO NEW A2 A+ 4.95 10/16/13 4.7 101.087 4.9
WELLS FARGO & CO NEW A2 A+ 4.63 04/15/14 4.6 100.154 4.6
WELLS FARGO & CO A2 A+ 5.00 11/15/14 4.7 101.165 4.9
WELLS FARGO BK NATL Aa3 AA- 4.75 02/09/15 5.2 97.643 4.9
WELLS FARGO BK NATL Aa3 AA- 5.75 05/16/16 5.8 99.600 5.8
WELLS FARGO & CO NEW A2 A+ 5.13 09/15/16 5.7 96.466 5.3
WELLS FARGO & CO NEW A1 AA- 5.63 12/11/17 5.6 100.227 5.6
WELLS FARGO & CO A1 AA- 5.38 02/07/35 6.1 90.569 5.9
WELLS FARGO BK NATL Aa3 AA- 5.95 08/26/36 6.7 90.536 6.6

Eaton has a few:

Issue Cpn Maturity YTM Price Cur Yld
EATON CORP A3 A- 5.95 03/20/14 4.4 106.322 5.6
EATON VANCE A3 A- 6.50 10/02/17 4.9 110.798 5.9
EATON CORP A3 A- 5.60 05/15/18 5.4 101.100 5.5
EATON CORP A3 A- 6.95 03/20/19 5.6 110.065 6.3
EATON CORP A3 A- 7.65 11/15/29 6.9 107.841 7.1
EATON CORP A3 A- 5.80 03/15/37 6.9 86.597 6.7

OK, this is as far as I want to take this write up, because the writing is tedious compared with doing the work offline for my own purposes. But the previous data samples clearly suggest that the project is doable. For most dividend-paying stocks, a corresponding bond could be found. The bond will typically offer a higher coupon than the stock dividend, but a lower capital gain. So that becomes the trade-off. If the bond can be bought at a steep discount to par and is sold at its maximally-favorable high price, then serious cap gains can be achieved. But that’s a trading gig, not an investing gig. If an investorly, buy-and-hold attitude is assumed toward the project, then a bunch of decision have to be made.

(1) At what point will the stock be considered to have reached “maturity”?
(2) Will the dividends (from stocks) and/or the coupons (from bonds) be re-invested or spent? (Re-investment skews results to the bond side.)
(3) How far out on the yield-curve is one willing to go?
(4) How far down on the credit-spectrum?
(5) How does one equate stock-risk to bond-risk, so the “risk-adjusted” becomes a meaningful, quantifiable term?

In short, looking at the problem raises a lot of interesting questions, and not just theoretical ones. With her surplus money from her pension, my sister would like to move that cash into the bond market. I’ve suggested that she wait until she has $10k to put to work and then we go shopping. I’m not a financial advisor, and my preference is the make my money in bonds rather than stocks. But the responsible thing for me to do is to review both of the choices she has (div stocks vs. bonds) and to estimate the more favorable path. She has owned div stocks before, as well as CDs, so those choices are familiar to her. It is corporate bonds that she (like most people) has never looked into.

At this point, I don’t know what might be the better path for her. The skills needed for building and managing a div stock portfolio (versus a bond portfolio) are obviously overlapping. But there are some crucial differences. If the next ten years becomes America’s “lost decade”, money now put to work in div stocks is going to suffer huge principal losses. If the US does muddle through, stock gains will clearly outpace bond returns. If her money is to be merely parked money, bonds might be her safer choice. If she wants gains, then div stocks might be her better choice. In either case, I know she wants a “buy 'em and forget about ‘em” program.

So, as always, her choices are a function of her intentions and her tolerance for risk. In other words, her investment plan will be a consequence of her over-all financial plan. But what is possible from the low-level investing side helps to shape what is decided in the high-level planning side. So the two do interact with each other, plus where we are in the market cycle matters hugely. If she had come to me back in March-April with money to put to work, I could have put together a starter bond portfolio offering a reasonably-assured 13% without a problem. Nowadays, getting a risk-equivalent 7% from bonds will take some scrambling, which inclines me to suggest that she explore the equity side rather than the bond side. Although I’m also beginning to wonder if a compromise –-BOTH the debt AND the common of selected, div-paying industrials-- might not be the best solution.

Lots to think about as another summer weekend approaches. http://boards.fool.com/Message.asp?mid=27798752
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