Solid Dividend Stocks: A Safer Alternative To Bonds

by: MyPlanIQ

One of the key questions is what to do with a fixed income portfolio -- either if you rely on fixed income as the whole or part of your portfolio. For those that are looking for income, this is a real concern. Jim Royal of the Motley Fool suggests an alternative to traditional fixed income instruments.

His view is that investors who flee to the safety of bonds when times get tough could be making a big mistake this time. Solid dividend stocks -- including blue chips -- are out performing 10-year U.S. Treasuries. He goes on to say that some of these dividend stalwarts pay higher yields than bonds offer and may provide a better way to navigate these choppy waters.

He points out the problems with bonds and the benefits that blue chip companies have gaining access to low interest rate money. He then goes on to outline his choice of equities to fill this bill.

This is an intriguing approach and worth measuring.

His choices are:

Chimera Investment


Exelon Corp


Intel Corp


Johnson & Johnson


National Grid plc


Annaly Capital Mgmnt


Southern Company


Summary rationale for the selection:

  • Chimera and Annaly Capital give access to real estate trusts which generate income
  • Johnson & Johnson and Intel are blue chip equities with strong equity performance that have the legs to last and deliver income
  • Southern, Exelon and National Grid have high dividend and sustainable income and key benefits in energy that will continue to have demand no matter what

We will compare these companies with our benchmark set of dividend ETFs that are well diversified.

The benchmark ETFs are:

Asset Fund in this portfolio
REAL ESTATE ICF (iShares Cohen & Steers Realty Majors,
FIXED INCOME TIP (iShares Barclays TIPS Bond,
Emerging Market VWO (Vanguard Emerging Markets Stock ETF,
US EQUITY DVY (iShares Dow Jones Select Dividend Index,
US EQUITY VIG (Vanguard Dividend Appreciation ETF,
INTERNATIONAL EQUITY IDV (iShares Dow Jones Intl Select Div Idx,
High Yield Bond HYG (iShares iBoxx $ High Yield Corporate Bd,
INTERNATIONAL BONDS EMB (iShares JPMorgan USD Emerg Markets Bond,

Portfolio Performance Comparison

Portfolio/Fund Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
P Bond Funds Momentum Based on Upgrading Fixed Income Managers of the Year`s Funds Monthly 4% 94% 11% 204% 9% 155%
Retirement Income ETFs Tactical Asset Allocation Moderate 6% 80% 10% 84% 10% 71%
Retirement Income ETFs Strategic Asset Allocation Moderate 4% 42% 6% 23% 3% 14%
Fools Safer Alternative to Bonds 13% 97% 4% 14%

As we are comparing what can be done to better bonds, I have included a comparison with the strategy that selects the best of the best bond managers on a monthly basis to provide context for the best of best bond performance.

Three Month Chart
(Click to enlarge)

One Year Chart
(Click to enlarge)

Three Year Chart
(Click to enlarge)

Five Year Chart
(Click to enlarge)

Performance details of an alternative bond strategy.

The theory of finding an alternative to bonds based on long term dividends is interesting and, perhaps, if you ignore the overall value of the portfolio, it may work. However, this selection has too much volatility. The bond portfolio manages to provide the stability necessary to make this work.

There are a lot of alternatives in the bond world and I would leave my money with the best of bond managers and rely on them to find the best alternative.

Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.