The bond investor's dilemma: how to crank out more yield without jeopardizing capital. These days it's nearly impossible. Returns are at historical lows.
My solution: Chuck your corporate bonds and move into the corporations' stocks. That way, you get far more for your buck. Dividend yields can be significantly higher than those paid by the same companies' bonds.
Example: Here's a bond portfolio maturing in 10 years, investment grade, comprising Progress Energy (PGN), McDonald's (NYSE:MCD), Kimberly Clark (NYSE:KMB), Merck (NYSE:MRK), and Unilever (NYSE:UN), yielding on average 2.3%. $100,000 equally divided among the 5 bonds pays $2300 a year. Do you sleep well at night holding this investment?
Most of the bonds have run up over 10% in price in the last year. Even the hint of inflation could crater your bond holdings. The group could easily drop 10% over the next year, all for a meager $2300. It's not a restful night portfolio despite being comprised of investment grade bonds.
What to do? Drop the bonds and move your cash into the stocks. The stock portfolio pays a more appealing 4%. This $100,000 stock selection pays $4000 a year. As for sleeping at night? Kimberly and McDonald's consistently raise dividends. Merck just bumped its, after a long slumber. Unilever has been increasing its payout. Progress Energy has gradually upped its dividend. It's due for an increase. You can sleep well: your yearly payments are likely to go up.
- Progress Energy (PGN): $16 billion market cap, PE 20, Dividend 4.6%. Electric Utility in North and South Carolina, Florida
- McDonald's (MCD): $97 billion market cap, PE 19, Dividend 3%. Fast Food.
- Kimberly Clark (KMB): $28 billion market cap, PE 17, Dividend 3.9%. Diapers, Tissues, Healthcare.
- Merck (MRK): $110 billion market cap, PE 25, Dividend 4.7%. Healthcare.
- Unilever (UN): $95 billion market cap, PE 16, Dividend 3.7%. Consumer Goods. Dutch company.
Disclosure: I am long KMB.