We have written a number of bullish articles on dividend paying stocks. We think that dividends help dampen an investor's portfolio against volatility and market uncertainty as well as provide investors with liquidity through cash flow from their investment portfolio.
That said, it's easy for investors to run to the perceived safety of U.S. Treasuries during times of uncertainty, but a spike in interest rates will hurt the value of these "risk-free" securities as well.
Dividend Stocks or Treasuries?
- U.S. Treasuries pay low nominal yields with no upside in interest income. As opposed to the 10 year Treasury that will pay you a nominal rate 3.0%, there are a number of high quality U.S. stocks that yield above 3%.
- Most dividend paying companies have a management team focused on increasing their dividend. Management teams can adopt to inflationary or deflationary forces and structural or secular changes to the U.S. economy.
- With the 10-year Treasury investors are making a one-way bet that rates will remain low for a prolonged period and there is limited margin of safety if rates do rise.
Below (click to enlarge), are some examples of high quality dividend stocks that have yields greater than the 10-year U.S. Treasury rate. On average, the stocks below have a 4.1% dividend yield.
Even though these stocks will benefit the most from a strengthening economy, they should also hold up well if there is more trouble on the horizon.
Disclosure: I am long ABT.