Why Dividend Stocks Can't Take The Place Of Bonds (III)

by: MyPlanIQ

There has been lively debate on a recent article on bonds versus dividend stocks (part II in this series), and I now note an article by Matt Koppenheffer of The Motley Fool proposing two sets of two stocks that he claims makes bonds look silly.

We know that interest rates are going to be held down for the foreseeable future, and the yields that investors can get from dividend-paying stocks are better than the yields that they can get from even longer-duration Treasury notes.

Based on the above, Koppenheffer came up with a couple of sets of suggestions. First, he looks at the telecom sector, where Frontier Communications (NYSE:FTR), Windstream (NASDAQ:WIN), and CenturyLink (NYSE:CTL) have yields of 11.9%, 10.5%, and 7.5%, respectively.

I have previously covered three telecom companies and why they should be considered as dividend stocks. I purchased Consolidated Communications (NASDAQ:CNSL) based on that. I don't like the idea of just having a telecom stock and so I will take all three of these and make them one part of the larger selection outlined below.

Returning to Koppenheffer, he then goes on to list three others:

  • Walgreen (WAG): Walgreen has a current dividend yield of 2.9% that is not remarkable, but it is one of S&P's dividend aristocrats
  • CSX (NYSE:CSX): Warren Buffet has been vocal in his support of railroads and the cost of fuel only plays to their strength. CSX's dividend record is more patchy than Walgreen's, but it has been more in focus lately.
  • Intel (NASDAQ:INTC): I am long Intel, as I expect it to continue to dominate the PC market and gain some share in the mobile market. Intel is unique in leveraging its manufacturing technology to help it win in this space. Intel's current yield is 3.2%

I am now going to construct a selection wherein 25% is invested in each of the three above and the last quarter shared among the telecom companies first listed. I will then proceed to make a comparison with our other bond replacement alternatives.

Portfolio Performance Comparison

Portfolio/Fund Name YTD
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 2% 3% 65% 13% 293% 9% 179%
BND 2% 6% 186% 7% 160% 6% 94%
MCD -9% 14% 149% 20% 160% 16% 76%
Four Stocks To Compete With Bonds -4% 5% 39% 15% 123% 8% 41%
Dividend Stocks Can`t Take The Place of Bonds III 0% -13% -51% 22% 94% 3% 9%

This is an area of intense interest and there are many opinions. My simplistic view is that this selection simply doesn't make the cut.

I buy into the idea that the telecom sector has low costs and will continue to make money, as people pay for their phone lines and internet service. There is always the lurking concern that some bundling of a cable service will severely reduce the market, but that hasn't happened yet. However, telecom stocks (CNSL, in my case) still have some volatility with regards to stock value - which is something of a concern.

I have been investing in Intel, and so I like the stock. I am loathe to second guess Buffett, but I am definitely iffy on Walgreen. Despite that, I just don't like the numbers. and I think there is a better way of looking for dividend stocks.

Three-Month Chart

One-Year Chart

Three-Year Chart

Five-Year Chart

Even though MCD has had its troubles over the past few months (I am long MCD), it still has an impressive record. I also like the performance of swapping in and out of the best bond funds. It may be that transaction cost is an issue, but the returns look solid.

This selection failed to make the cut for me, but this is certainly an area of interest. More data...

Disclosure: I am long INTC, MCD, CNSL.

Additional 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.

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