As everyone continues to stampede into U.S. Treasury debt of increasingly lengthening maturity (theoretically to avoid risk), this movement is creating a dangerous environment for certain investors. These investors have worked and saved for years, and depend on their savings to live their lives. What if we don't have a recession? Sure it seems unthinkable, but what if rates on 10-yr (1.7%) or 30-yr (2.8%) are not predicting a real depression, but in fact are merely the result of central bank manipulation?
Lose - Lose
The markets are complex instruments that reflect many possibilities and outcomes. There are many forces that impact what happens next, some naturally legitimate and others with a dark force of intent. Almost never does the market do exactly what one expects. There is some truth in the phrase "the function of the market is to separate most of the people from their money".
The only justification for locking in fixed income yields at this time is panic over the alternatives. To accept a paltry return on invested capital based on the belief that a return is better than something less simply reflects a fear of depression. Making investment decisions based on fear is the absolute worst way to preserve your earnings power and net worth.
If this latest bout of panic fizzles and the world instead grows in the future, then investors rushing into long bonds will see substantial losses. It would not be unreasonable to assume depletion of value from 20% to 40%, depending on the speed of the recovery. An investor that is panicking today over the tumultuous roller coaster ride in equities should pause and consider the implications of top-ticking the panic. Losing another 20+%, or locking in a rate of return below inflation, will not be any less damaging for the future.
Fortunately, there is a way to hedge this dilemma that gives a reasonable return relative to U.S. Treasuries and protects against locking in no growth (in the event that inflation rears its ugly head over time). The solution is a model portfolio of diversified large cap Blue-Chips that are paying dividends over 2%, with international exposure to protect against a declining dollar, and strong cash flows to provide a cushion in bad times.
20 Blue-Chips That Easily Beat Treasuries
We can think of many stocks that will yield more than 2% and that we believe will be higher in price over the next 10 years. And to refine the list down, we are using the following criteria:
- Must be a large multinational diversified large cap of $25B+
- Must operate as a top leader in a major industry
- Must believe value will grow over the subsequent 10 years
- Must yield over 2%
Note: we published a similar list on August 11 in an article entitled"Don't Fight The Fed, Instead Buy These 20 Blue-Chips". We are revising our ideas by removing a few stocks that had exceptional increases. Companies removed are Kimberly-Clark (NYSE:KMB) up 10% and Home Depot (NYSE:HD) up 17%, We added Pfizer (NYSE:PFE) and Kraft (KFT).
The following are our recommendations ranked by yield:
1) Kraft (KFT): $33.72 yield 3.40% 52wk 29.8 - 36.30, market cap $60B
2) Conoco Phillips (NYSE:COP): $62.51 yield 4.10% 52wk 55.00 - 81.80 market cap $86B
3) Philip Morris (NYSE:PM): $63.81 yield 4.60% 52wk 54.66 - 72.74 market cap $112B
4) Intel (NASDAQ:INTC): $22.16 yield 3.80% 52wk 18.75 - 23.96 market cap $116B
5) General Electric (NYSE:GE): $15.21 yield 3.90% 52wk 14.72 - 21.65 market cap $161B
6) Arcelor Mittal (NYSE:MT): $15.35 yield 3.90% 52wk 14.77 - 38.88 market cap $25B
7) Wal-Mart (NYSE:WMT) $50.80 yield 2.80% 52wk 48.31 - 57.90 market cap $175B
10) Pepsico (NYSE:PEP): $60.34 yield 3.40% 52wk 59.25 - 71.89 market cap $95B
11) Time Warner (NYSE:TWX) :$29.89 yield 3.10% 52wk 27.62 - 38.62 market cap $31B
12) General Dynamics (NYSE:GD): $55.92 yield 3.30% 52wk 53.95 - 78.27 market cap $20B
13) Boeing (NYSE:BA): $59.51 yield 2.80% 52wk 56.01 - 80.65 market cap $44B
14) Coca-Cola (NYSE:KO): $67.42 yield 2.70% 52wk 57.72 - 71.77 market cap $155B
15) 3M (NYSE:MMM): $73.99 yield 2.90% 52wk 72.00 - 98.19 market cap $53B
16) JP Morgan (NYSE:JPM): $29.59 yield 3.30% 52wk 28.53 - 48.36 market cap $115B
17) Exxon Mobil (NYSE:XOM): $69.31 yield 2.60% 52wk 60.90 - 88.23 market cap $337B
18) Microsoft (NASDAQ:MSFT): $25.06 yield 3.20% 52wk 23.65 - 29.46 market cap $210B
19) BHP Billiton (NYSE:BHP): 67.74 yield 3.10% 52wk 65.82 - 104.59 market cap $185B
20) Caterpillar (NYSE:CAT): $73.86 yield 2.30% 52wk 72.60 - 116.55 market cap $48B
The herd mentality is strong and investors have the desire to be safe. However, we believe that chasing Treasuries for yield at these rates will ultimately be a massive mistake. While today's fear is 'the recession is coming', tomorrow's could easily be 'the Fed is behind the curve and inflation is going to run rampant'. We are confident that the 20 stocks listed above will provide yields greater than U.S. Treasuries over the next 10 years, along with strong appreciation potential with modest risk.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.