Let’s face it, income investing can be a challenge these days. With the Federal Reserve on record as saying it intends to keep the Federal Funds rate at zero for another 18 months or so, buying treasuries is a losing proposition. Even if you venture all the way out to a 10-year note, the 2 percent yield isn’t keeping pace with inflation (currently running at more than 3 percent.)
One workaround to the negative real returns on treasuries is to tilt your income portfolio more heavily into high-grade corporate bonds. OK, those aren’t exactly overflowing with income, either — they pay about 2 percent more on average than treasuries, but that just means you’re often locking in a fixed yield of just 3 to 4 percent.
Some appealing blue chips
The better play could be to skip the bond of many blue chips and invest in its stock instead. It turns out plenty of classic high-quality blue chip U.S. stocks have stock dividend yields higher than what they’re paying on their bonds. For example, this past summer PepsiCo (PEP) floated short-term bonds with yields under 2 percent, while the current dividend yield on PepsiCo stock is 3.2 percent. Over at Johnson & Johnson (JNJ), bonds maturing in 2019 have a yield to maturity under 3 percent, while JNJ’s dividend yield is 3.6 percent.
- Johnson & Johnson
- Procter & Gamble
Same sort of story at Procter & Gamble, (PG) where the 3.2 percent dividend yield beats out what most of its bonds pay. Microsoft’s 3.1 percent yield (MSFT) exceeds the payout on its bonds with maturities out past 20 years. In a recent Wall Street Journal commentary, Burton Malkiel, professor emeritus at Princeton and author of the classic A Random Walk Down Wall Street, pointed out that the dividend yield on AT&T (ATT) stock is nearly double the interest payout on its 10-year bonds.
You get the idea. For income seekers in the corporate arena, it’s the stock dividend — not the bond — that should get your attention.
An added benefit of a dividend-based income strategy is that if you cozy up to a company with a history of raising its dividend, you’re effectively creating an income stream that has a shot at keeping pace with inflation. Can’t say that about a fixed-income bond payout.
The $7.9 billion SPDR S&P Dividend ETF (SDY) trawls the S&P 1500 index for companies that have managed to increase their dividends for at least 25 consecutive years. There are also plenty of actively managed funds that focus on stocks of firms that are poised to increase their dividends, such as Vanguard Dividend Growth (VDIGX). Or you can, of course, build your own portfolio of individual stocks that deliver dividend income. For the patient, long-term investor, over time, you’re not only pocketing the dividend, but you also have the prospect of capital appreciation as well. That’s doubly compelling in today’s world, where treasury yields of 1 to 2 percent lock you into inflation-lagging yields.
More about personalized wealth management at Personal Capital.
The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.
Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.