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Subject:  Div Stocks vs. Bonds Date:  3/19/2013  6:57 PM
Author:  globalist2013 Number:  34835 of 36724

Vedran Vuk writes a scathing critique of div stocks. 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 " 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.

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