In the past couple of years, many investors saw shocking events like the failure of Lehman Brothers, and even saw many blue chip stocks plunge to the single digits. With these events still very fresh in the minds of most investors, it's easy to see why so many have piled into Treasury bonds. To make matters worse, the European debt crisis has been plaguing the markets for many months, and it continues to be a slow moving potential train wreck.
The debt crisis in Europe only made U.S. Treasury bonds more attractive, as global investors rushed into them as a safety trade. Even a Standard & Poors downgrade of the U.S. credit rating wasn't enough to slow demand for these bonds for long. The problem is that many investors have rushed into Treasuries for safety, and that means rates are extremely low and prices are high. A number of top investors and analysts believe that there is a bubble in the bond market, which will eventually pop when interest rates rise.
Whether or not that happens remains to be seen; however, what is clear is that investors in these types of bonds are going to see little in the way of returns. Also, there is always the risk that global investors turn against Treasury bonds, just as they have with European sovereign bonds. When investors lose confidence in a country to pay back its obligations, yields can suddenly rise. This creates a downward spiral just as we have seen in Europe. When a country can sell bonds for 3%, it looks solvent, but if rates rise to 5 or 6%, it's suddenly a candidate for insolvency and bailouts. While this still seems unlikely for the United States, it is a risk that bond investors should consider.
Treasury and even corporate bonds remain near historically low levels, and provide little income for investors. 30-year Treasuries yield about 3%, and the 10-year is yielding less than 2%. These bonds also offer little comfort for investors who are concerned about inflation, which eventually could be an issue. All of this should lead investors into dividend stocks. The yields from many dividend stocks are much higher than Treasuries, plus many corporations are flush with cash and have better and more transparent balance sheets than the U.S. government does. Investing in dividend stocks can also offer inflation protection, because companies can raise prices and the dividend over time. While short-term volatility will remain, in the long run, the stocks below are likely to vastly outperform Treasury and other low-yielding bonds:
Microsoft Corporation (NASDAQ:MSFT) is a software giant and also makes consumer products, such as the Xbox. It also provides communication services like Skype. This company has billions in cash on the balance sheet and a solid dividend that provides a yield similar to the 30-year Treasury bond. The difference is that Microsoft is likely to grow earnings considerably over the next 30 years, and that means the dividend can rise significantly. The other difference is that this company has almost $51 billion in cash on the balance sheet and only about $13 billion in debt. Compare that to the obligations of the U.S. government and you can see why this stock is probably a much better investment. Microsoft shares have been getting noticed lately. Since the stock has been rising, it makes sense to wait for pullbacks before buying.
Here are some key points for MSFT:
- Current share price: $29.95
- The 52 week range is $23.65 to $30.05
- Earnings estimates for 2011: $2.68 per share
- Earnings estimates for 2012: $2.99 per share
- Annual dividend: 80 cents per share which yields 2.7%
Merck and Company, Inc. (NYSE:MRK) is global pharmaceutical company offering vaccines and a number of consumer health products. Many pharmaceutical companies have seen patent expirations for some key drugs, but this concern seems to be priced in now. Companies like Merck have made efforts to cut costs and acquire new potential blockbuster drugs, so profits have remained stable. Pharmaceutical companies tend to see strong demand even in recessions and can be a defensive asset when markets decline. These companies also tend to benefit during inflationary periods since drug costs usually rise over time as well. This dividend will beat Treasury bonds by a wide margin with a yield that more the doubles returns on the 10-year bond and also beats the 30-year.
Here are some key points for MRK:
- Current share price: $38.44
- The 52 week range is $29.47 to $39.43
- Earnings estimates for 2011: $3.76 per share
- Earnings estimates for 2012: $3.83 per share
- Annual dividend: $1.68 per share which yields 4.4%
McDonald's Corporation (NYSE:MCD) offers consumers breakfast, lunch and dinner meals with a menu based on value. This company has growth potential in countries like China and Brazil, and those consumers will want the convenience and value that McDonald's offers. This company has a strong balance sheet and a dividend yield that beats the 10-year Treasury bond and pays almost the same as the 30-year bond. McDonald's could easily see sales and profits double in the next ten years due to organic growth and price increases. That means investors could be looking at potentially doubling their money, and the dividend payout over the next ten years or so. Meanwhile, a bond investor is likely to only achieve about one-third of that type of payout after ten years. This stock recently hit new highs, and buying the dips makes sense.
Here are some key points for MCD:
- Current share price: $98.62
- The 52 week range is $72.89 to $102.22
- Earnings estimates for 2011: $5.72 per share
- Earnings estimates for 2012: $6.32 per share
- Annual dividend: $2.80 per share which yields 2.8%
Verizon (NYSE:VZ) provides voice communications, Internet access, broadband data, long distance, etc. This company has been also selling the very popular iPhone and that has been a great boost for revenues. The average dividend yield for a stock in the S&P 500 Index, is about 2%. Verizon shares have recently pulled back from the 52 week high and now offer a yield of more than double the average at about 5.3%. Between
subscriber growth and price increases, revenues could double for Verizon over the next ten years and when you combine that with annual dividends of over 5%, the potential gains really start to add up. Buying this stock on dips is likely to lead to long-term rewards.
Here are some key points for VZ:
- Current share price: $37.56
- The 52 week range is $32.28 to $40.48
- Earnings estimates for 2011: $2.20 per share
- Earnings estimates for 2012: $2.55 per share
- Annual dividend: $2 per share which yields 5.3%
Bristol-Myers Squibb (NYSE:BMY) is a global pharmaceutical company with a pipeline that includes blockbusters like Plavix and Abilify. Drug companies have historically been able to raise prices over time and this means revenues and profits can rise. Plus, some investors and analysts believe that a larger drug company might find Bristol-Myers to be an attractive takeover target. If a buyout occurs, the gains could be substantial, but even without a takeover, the dividend yield and potential profit growth makes this stock a much better alternative to bonds. This stock has pulled back from the 52 week high in recent days, and now looks like a good time to start accumulating.
Here are some key points for BMY:
- Current share price: $32.31
- The 52 week range is $24.97 to $35.44
- Earnings estimates for 2011: $1.97 per share
- Earnings estimates for 2012: $1.94 per share
- Annual dividend: $1.36 per share which yields 4.2%
Philip Morris International (NYSE:PM) is a leading maker of tobacco products and cigarettes. This company owns many well-known brand names such as Marlboro, Merit, Parliament, Virginia Slims, L&M, Chesterfield, etc. This product line produces steady revenues even in bad times, because few consumers are willing to give it up. Tobacco stocks are not exciting, but that is what bond investors usually want. Profits are likely to grow over the years, and that means dividend increases are likely. With this stock yielding over 4%, it makes sense to buy this bond-busting stock on any dips.
Here are some key points for PM:
- Current share price: $75.84
- The 52 week range is $57.49 to $79.96
- Earnings estimates for 2011: $4.86 per share
- Earnings estimates for 2012: $5.18 per share
- Annual dividend: $3.08 per share which yields 4.1%
Data is sourced from Yahoo Finance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.