Blue Chip Portfolio With Dividend Yields Double Returns From The 10-Year Treasury

 |  Includes: COP, JNJ, KO, MDLZ, PFE, PG, SNY, TOT, WMT
by: Devon Shire

When dealing with the gong show that has been our equity markets over the past few weeks, at some point in time you have to make a decision. Either you decide that the world is going to end, or you decide that the sun is going to keep coming up every day for the foreseeable future.

I think the answer is pretty obvious, but there are certainly a lot of people today investing as though there will never be another happy day for any of us. How else can you possibly explain choosing to give your money to the United States Government for 10 years at a rate of 1.9% instead of buying a portfolio of high quality blue chips that have dividend yields double that ?

Consider option A if you will. Investing in a 10 year US Treasury yielding 1.9%:

  • The entity that you are entrusting your money (the United States government) to is the largest single debtor in the history of the world.
  • That debt grows every second of every day.
  • This borrower been intentionally engaging in activities (quantitative easing) that are will unquestionably reduce the value of your loan over time.
  • This borrower is run by a management group of dueling parties who clearly have their own interests far in front of anything else (witness the debt ceiling debacle)
  • Your payment for lending to this borrower is fixed and does not grow (susceptible to inflation)
  • The rate on your payment is a princely 1.9%

Then consider option B. Investing in a portfolio of the greatest companies in the world:

  • The PE ratio on a group of mega cap blue chips is likely very close to 10 if you adjust for their net cash positions
  • A PE of 10 is like an earnings yield of 10% which is five times the yield received from a 10 year Treasury
  • Unlike the payment from Uncle Sam, these earnings yield grows over time (not destroyed by inflation)
  • Forget the earnings yield, the dividend yield alone on a portfolio of these high quality companies is double that of the 10 year Treasury
  • The balance sheet of these companies together has hundreds of billions in net cash (not drowning in debt like Option A) so there is little risk of permanent capital impairment

Isn’t it strange that while acting out of fear and in a flight to safety, investors are running to give money to the entity that is loaded with debt while taking that money away from the stronger entities? And in doing so, said investors are receiving almost nothing in return and risking large permanent losses should inflation pick up?

Running to Treasuries when the equity markets are volatile will temporarily allow you to escape from the daily drop in the paper value of your equity holdings. But over the long term, investing in Treasuries at these yields is far more risky than investing in a portfolio of good companies. Especially when central banks around the world for years have been priming the pump on inflation.

Volatility and paper movement in value on a day to day basis is not risk. Permanent impairment of capital is what you need to be afraid of.

So how about instead of running to Uncle Sam for safety, consider a portfolio that consists of the following corporate world beaters. Put your money in, then enjoy the dividend checks for a couple of years while ignoring the daily stock quotes. I think that will be a far more rewarding experience than fretting over the daily upheaval in the market and locking yourself into low-yield government debt.



Share Price

Dividend Yield





P & G




Kraft Foods




Johnson & Johnson












Sanofi Aventis












Average Yield


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The cumulative dividend yield of 3.89% alone on these great companies in an evenly weighted portfolio is double that of the 10 year US Treasury. Buy this group of stocks and ten years from now the earnings of the group will be higher, the dividends you are receiving will have increased and I suspect you will be sitting on some nice capital gains as well.

Just the earnings increases alone will cause the stock prices to increase even if the pessimistic earnings multiples do not improve. If ten years from now the world is a brighter pace and this group sports the premium earnings multiple that it should then your returns could be very large indeed.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.