Income Investors Should Be Buying Equities

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 |  Includes: CVX, DD, HD, INTC, JNJ, KO, MCD, MDLZ, MRK, PFE, PG, T, VZ, XOM
by: Paul Price
It’s a topsy-turvy world right now, with short-term interest rates near zero and even the 5 and 10-year treasuries paying peanuts. As of July 16, 2010 the 5-year note was yielding 1.7576% and the 10-year note was paying 2.9955%.
That’s pre-tax. Take away even 30% for combined federal and state taxes and the 5-year comes to 1.23% with the 10-year at 2.10%. Nobody I know believes their own cost of living has been flat to down, as the government reports. Take away even 2.5% per year for inflation and both the 5 and 10-year bonds become clear losers in terms of buying power preservation on an after-tax and inflation-adjusted basis.
So what’s a person to do? Defy conventional logic and ‘Buy stocks for income’.
Ticker
7/16/00 Dividend Rate
7/16/10
Dividend Rate
10-Year * Div. Growth
7/16/10 Current Yield
5-Year Treasury Yield
10-Year Treasury Yield
Verizon (NYSE:VZ)
$1.54
$1.92
24.7%
7.19%
1.7576%
2.9955%
AT&T (NYSE:T)
$1.01
$1.68
66.3%
6.80%
1.7576%
2.9955%
Pfizer (NYSE:PFE)
$0.36
$0.72
100%
4.95%
1.7576%
2.9955%
DuPont (NYSE:DD)
$1.40
$1.64
17.1%
4.56%
1.7576%
2.9955%
Merck (NYSE:MRK)
$1.21
$1.52
25.6%
4.23%
1.7576%
2.9955%
Kraft** (KFT)
$0.54
$1.16
114.8%
4.03%
1.7576%
2.9955%
Chevron (NYSE:CVX)
$1.30
$2.88
121.5%
4.03%
1.7576%
2.9955%
J & Johnson (NYSE:JNJ)
$0.62
$2.16
248.4%
3.63%
1.7576%
2.9955%
Home Depot (NYSE:HD)
$0.16
$0.94
487.5%
3.47%
1.7576%
2.9955%
Coca Cola (NYSE:KO)
$0.68
$1.76
158.8%
3.36%
1.7576%
2.9955%
McDonald's (NYSE:MCD)
$0.22
$2.20
900%
3.15%
1.7576%
2.9955%
P & G (NYSE:PG)
$0.64
$1.89
195.3%
3.05%
1.7576%
2.9955%
Intel (NASDAQ:INTC)
$0.07
$0.64
814.3%
3.04%
1.7576%
2.9955%
Exxon Mob. (NYSE:XOM)
$0.88
$1.74
97.7%
3.04%
1.7576%
2.9955%
10-Year Average
240.86%
4.18%
Average Excluding MCD and INTC
138.14%
* Cumulative
** Kraft’s starting dividend rate from 2001
Click to enlarge
14 of the 30 DJIA stocks now yield an average of 4.18%, well more than the 10-Year Treasury’s 2.9955% fixed-rate return. If you lock in that T-bond rate today, the best you can hope for is to capture that < 3% interest rate and get your [inflation ravaged] principal back at face value. $100,000 in 5-year bonds will produce just $1,767.50 in annual income right now. $100,000 in 10-year bonds will produce just $2,995.50 in annual income right now. $100,000 equally divided among the 14 listed stocks would provide $4,180 in yearly income at today’s dividend rates. Your first year’s income advantage for stocks versus 10-year bonds would be $1,184.50 or 39.54%.
Unlike the fixed-rate T-bonds, the 14 companies have a history of increasing their payouts. Over the past decade they averaged a 240.86% cumulative increase. Even if you ‘throw out’ the huge increases from McDonald's and Intel as outliers, the other 12 still went up 138.14% on average over the 10-year period.
You could choose to lock in one of the worst rates in modern history and virtually guarantee a big loss in after-tax, after inflation buying power by owning Treasuries. Or… you could opt for a diversified portfolio of blue chip companies that pay you more income to start and are likely to increase that amount year after year.
Unless you believe that America is going down the drain completely I think the correct choice is quite obvious. Even if you do think our country is heading for a ‘Grecian Formula’ moment ask yourself, “What will the value of the $ U.S. be on world markets if that occurs?”
High quality shares of solid companies are much more likely to hold their value than paper assets backed by a shaky currency. I know where I’m putting my money and it’s not into bonds.
Disclosure: None