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No. of Recommendations: 2
Investing in stocks for the dividends they might pay isn’t a game I play. But it is a popular form of gambling, and that got me to wondering how it compared to its counterpart, buying bonds for the coupons they might pay. In both cases, there’s a potential income component and a potential capital gains (or losses) component. So I ran the numbers on my all-bond portfolio just to see what its profile might be and how that might compare to what the stocks are doing these days as their prices continue to decline.

These are the raw numbers where “CY” equals “Current Yield” in its customary meaning, and “P/L” is the annual gain (or loss) from the difference between the purchase-price and the exit-price (aka, par) expressed as a percentage of the entry-price. In other words, exactly the same formula was used to calculate P/L as is universally used to calculate CY. So your choice is to accept both, or to accept neither. The first pair is ranked in descending order by CY; the second, by P/L.

CY P/L CY P/L
27.2% 0.7% 4.6% 24.7%
16.4% 16.4% 13.3% 20.3%
15.8% 3.4% 13.7% 16.9%
15.3% 5.3% 16.4% 16.4%
13.8% 6.5% 10.9% 12.7%
13.7% 16.9% 1.3% 11.4%
13.4% 0.8% 10.7% 11.1%
13.3% 20.3% 6.7% 10.4%
13.2% 3.8% 12.1% 10.3%
13.0% 4.6% 12.5% 8.6%
12.7% 4.8% 5.8% 7.8%
12.7% 1.5% 3.4% 7.8%
12.5% 8.6% 13.8% 6.5%
12.3% 2.0% 7.3% 6.5%
12.3% 2.8% 3.6% 6.5%
12.2% 3.1% 7.7% 6.2%
12.1% 10.3% 7.3% 6.2%
12.1% 6.1% 12.1% 6.1%
11.9% 1.6% 8.2% 5.5%
11.7% 2.5% 15.3% 5.3%
11.6% 3.9% 11.0% 5.2%
11.5% -0.5% 9.7% 5.0%
11.5% -1.3% 6.9% 5.0%
11.3% 1.9% 7.7% 4.9%
11.2% 3.0% 12.7% 4.8%
11.0% 1.0% 5.1% 4.7%
11.0% 5.2% 10.0% 4.7%
11.0% 2.4% 13.0% 4.6%
10.9% -1.8% 9.9% 4.1%
10.9% 12.7% 9.7% 3.9%
10.9% 2.8% 11.6% 3.9%
10.9% 1.2% 13.2% 3.8%
10.8% 2.5% 7.3% 3.5%
10.7% 1.8% 9.5% 3.5%
10.7% 11.1% 8.9% 3.5%
10.7% 1.9% 9.0% 3.4%
10.6% 1.6% 15.8% 3.4%
10.5% 1.0% 4.4% 3.3%
10.4% 1.3% 8.4% 3.3%
10.4% 1.0% 12.2% 3.1%
10.3% 1.0% 11.2% 3.0%
10.2% 0.8% 6.2% 2.8%
10.1% 0.9% 12.3% 2.8%
10.0% 4.7% 6.8% 2.8%
9.9% 1.1% 5.5% 2.8%
9.9% 1.5% 9.0% 2.8%
9.9% 4.1% 10.9% 2.8%
9.7% -0.3% 6.7% 2.6%
9.7% 5.0% 9.5% 2.5%
9.7% 3.9% 10.8% 2.5%
9.6% -1.5% 11.7% 2.5%
9.5% 2.5% 7.5% 2.5%
9.5% 3.5% 5.4% 2.5%
9.5% 2.2% 11.0% 2.4%
9.4% 1.3% 9.2% 2.4%
9.3% 2.2% 5.7% 2.4%
9.2% 0.6% 9.2% 2.4%
9.2% 2.4% 6.3% 2.2%
9.2% 2.4% 9.5% 2.2%
9.2% -0.7% 9.3% 2.2%
9.2% 0.9% 7.0% 2.2%
9.1% 1.0% 8.2% 2.0%
9.1% 0.2% 12.3% 2.0%
9.1% 1.7% 7.0% 1.9%
9.1% -0.2% 11.3% 1.9%
9.0% 3.4% 10.7% 1.9%
9.0% 1.7% 7.4% 1.8%
9.0% 0.8% 10.7% 1.8%
9.0% 1.4% 9.1% 1.7%
9.0% 2.8% 9.0% 1.7%
9.0% -0.4% 11.9% 1.6%
9.0% 0.5% 10.6% 1.6%
8.9% 3.5% 6.5% 1.6%
8.8% -1.9% 8.0% 1.6%
8.8% -1.9% 6.2% 1.5%
8.7% -0.2% 12.7% 1.5%
8.7% 1.4% 9.9% 1.5%
8.6% 0.9% 5.5% 1.4%
8.6% 1.3% 8.7% 1.4%
8.6% 0.1% 7.8% 1.4%
8.6% -0.4% 9.0% 1.4%
8.6% 0.7% 8.6% 1.3%
8.5% -0.2% 8.3% 1.3%
8.5% -0.9% 10.4% 1.3%
8.5% 0.7% 5.7% 1.3%
8.4% 1.1% 7.1% 1.3%
8.4% 1.3% 9.4% 1.3%
8.4% -0.2% 8.4% 1.3%
8.4% 0.5% 6.1% 1.2%
8.4% 3.3% 10.9% 1.2%
8.3% -0.2% 8.0% 1.2%
8.3% 1.3% 6.2% 1.2%
8.3% 0.3% 6.1% 1.1%
8.3% -0.2% 6.8% 1.1%
8.2% 0.0% 8.4% 1.1%
8.2% 5.5% 9.9% 1.1%
8.2% 2.0% 11.0% 1.0%
8.2% 0.1% 10.5% 1.0%
8.1% 0.9% 9.1% 1.0%
8.1% 0.0% 7.1% 1.0%
8.1% -0.7% 10.3% 1.0%
8.0% -0.6% 10.4% 1.0%
8.0% 1.6% 7.6% 1.0%
8.0% 0.0% 8.1% 0.9%
8.0% 0.7% 7.8% 0.9%
8.0% 1.2% 7.8% 0.9%
8.0% 0.3% 10.1% 0.9%
8.0% 0.4% 9.2% 0.9%
7.9% -0.2% 8.6% 0.9%
7.9% -0.1% 10.2% 0.8%
7.9% -0.1% 9.0% 0.8%
7.9% 0.0% 13.4% 0.8%
7.9% 0.0% 7.4% 0.8%
7.8% 0.2% 6.9% 0.8%
7.8% -0.9% 8.5% 0.7%
7.8% 0.5% 5.7% 0.7%
7.8% 0.9% 7.0% 0.7%
7.8% 1.4% 7.5% 0.7%
7.8% -0.2% 8.6% 0.7%
7.8% 0.9% 8.0% 0.7%
7.8% 0.1% 7.4% 0.7%
7.7% 6.2% 27.2% 0.7%
7.7% -0.5% 6.9% 0.6%
7.7% 0.2% 9.2% 0.6%
7.7% 4.9% 5.4% 0.6%
7.7% -0.1% 4.9% 0.5%
7.7% -0.3% 7.8% 0.5%
7.6% 0.4% 9.0% 0.5%
7.6% 1.0% 6.1% 0.5%
7.6% -0.5% 6.8% 0.5%
7.6% -0.8% 7.2% 0.5%
7.6% 0.1% 8.4% 0.5%
7.5% 2.5% 6.4% 0.4%
7.5% -0.1% 8.0% 0.4%
7.5% 0.7% 7.6% 0.4%
7.5% 0.3% 7.0% 0.4%
7.5% 0.2% 7.4% 0.4%
7.4% 1.8% 6.6% 0.3%
7.4% 0.8% 8.0% 0.3%
7.4% 0.7% 6.1% 0.3%
7.4% 0.4% 7.4% 0.3%
7.4% -0.2% 7.2% 0.3%
7.4% -0.3% 8.3% 0.3%
7.4% 0.3% 5.5% 0.3%
7.4% -0.3% 4.7% 0.3%
7.4% -0.1% 7.1% 0.3%
7.3% -0.2% 7.5% 0.3%
7.3% 3.5% 6.5% 0.3%
7.3% 6.5% 6.4% 0.3%
7.3% 6.2% 4.7% 0.2%
7.2% 0.2% 9.1% 0.2%
7.2% -0.5% 7.7% 0.2%
7.2% 0.3% 7.5% 0.2%
7.2% 0.5% 7.2% 0.2%
7.2% -0.1% 7.8% 0.2%
7.1% 1.3% 6.4% 0.1%
7.1% -0.1% 8.6% 0.1%
7.1% -0.1% 7.8% 0.1%
7.1% 0.3% 8.2% 0.1%
7.1% -0.1% 5.9% 0.1%
7.1% -0.1% 7.6% 0.1%
7.1% 1.0% 6.8% 0.0%
7.0% -0.9% 7.9% 0.0%
7.0% -0.1% 6.7% 0.0%
7.0% 0.7% 8.0% 0.0%
7.0% 0.4% 6.4% 0.0%
7.0% -0.2% 8.2% 0.0%
7.0% -0.2% 6.0% 0.0%
7.0% 1.9% 6.5% 0.0%
7.0% 2.2% 6.7% 0.0%
6.9% 5.0% 7.9% 0.0%
6.9% 0.8% 8.1% 0.0%
6.9% -0.5% 7.5% -0.1%
6.9% 0.6% 7.0% -0.1%
6.8% 0.0% 7.1% -0.1%
6.8% 1.1% 7.1% -0.1%
6.8% 2.8% 6.5% -0.1%
6.8% 0.5% 7.1% -0.1%
6.7% 2.6% 7.9% -0.1%
6.7% 10.4% 7.4% -0.1%
6.7% 0.0% 7.2% -0.1%
6.7% 0.0% 7.7% -0.1%
6.6% -0.7% 7.9% -0.1%
6.6% 0.3% 7.1% -0.1%
6.5% 0.0% 7.8% -0.2%
6.5% 1.6% 7.0% -0.2%
6.5% -0.1% 9.1% -0.2%
6.5% 0.3% 7.0% -0.2%
6.4% 0.4% 8.3% -0.2%
6.4% 0.0% 7.4% -0.2%
6.4% 0.1% 8.4% -0.2%
6.4% 0.3% 8.7% -0.2%
6.3% 2.2% 6.1% -0.2%
6.2% 1.2% 7.9% -0.2%
6.2% 2.8% 7.3% -0.2%
6.2% 1.5% 8.3% -0.2%
6.1% 1.1% 8.5% -0.2%
6.1% -0.2% 5.9% -0.3%
6.1% 0.3% 7.4% -0.3%
6.1% 1.2% 9.7% -0.3%
6.1% 0.5% 7.7% -0.3%
6.0% 0.0% 7.4% -0.3%
6.0% -1.0% 5.9% -0.4%
5.9% 0.1% 8.6% -0.4%
5.9% -0.4% 9.0% -0.4%
5.9% -0.3% 6.9% -0.5%
5.8% 7.8% 7.6% -0.5%
5.7% 0.7% 7.7% -0.5%
5.7% 2.4% 7.2% -0.5%
5.7% 1.3% 11.5% -0.5%
5.5% 0.3% 8.0% -0.6%
5.5% 2.8% 9.2% -0.7%
5.5% 1.4% 6.6% -0.7%
5.4% 2.5% 8.1% -0.7%
5.4% 0.6% 7.6% -0.8%
5.1% 4.7% 8.5% -0.9%
4.9% 0.5% 7.0% -0.9%
4.7% 0.3% 7.8% -0.9%
4.7% 0.2% 6.0% -1.0%
4.6% 24.7% 11.5% -1.3%
4.4% 3.3% 9.6% -1.5%
3.6% 6.5% 10.9% -1.8%
3.4% 7.8% 8.8% -1.9%
1.3% 11.4% 8.8% -1.9%

The obvious downside to buying bonds for their current-yield is that very little money --with rare exceptions-- is going to be made from capital-gains. In fact, some capital losses --albeit modest ones-- will be suffered unless one never buys at premium to par (which can be a good strategy but, also, a very limiting one, for excluding a lot of profitable opportunities ). Whereas with a dividend-stock strategy, the expectation is that, though the gains from dividends will, on average, be modest, the capital-gains will be substantial. (Dividends become “Icing on the cake”, so to speak.)

The obvious upside to favoring bonds over div-stocks is that bonds are puts and resistant –though not impervious— to price declines. Thus, in either case, money can be made from either factor: current income or cap-gains. Where the two strategies differ is in the certainty of each source of revenue. Bond coupons, typically, never increase, nor decrease. But stock dividends do vary. Bond price vary hugely, just as do stock prices. But, typically, and probably more often than dividend -stocks have been able to be exited at an increase over one’s entry-price in the last decade (and the several going forward), bonds mature. So the cap-gains/losses of bonds are easier to stabilize, not that a comparable stability can’t be achieved with stocks as well, just as bond returns can be enhanced to a level comparable to the average total-returns available from stocks. It just depends on how one wants to frame the goal and how much extra machinery one wants to employ.

Why can these two strategies be compared? Because "Risk is risk, no matter where it is found". There's nothing inherently superior in a div-stock strategy over a couponed-bond strategy, and any differences in returns obtained are solely due to risks accepted. If you want more total-return, then you have to accept more total-risk, and either gambling game offers a wide range of both, and either can be done "conservatively", or "aggressively", or something in-between.

Charlie
-----------
PS Zeros were excluded from this exercise, not because their returns are less, but because they merit their own discussion.
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