Forget The VIX, The 10-Year Treasury Is Your Fear Gauge: 5 Potential Dividend Plays

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Includes: DTYL, DTYS, IEF, KO, MDT, MO, SO, TAP, TYNS, VXX, VXZ
by: Bear Fight

Post-2008 investors and market commentators have become enamored with the VIX or the so called "fear index." VIX is the Chicago Board Options Exchange Market Volatility Index, which is a measure of the implied volatility of S&P 500 index options. The VIX is often referred to as the fear index or the fear gauge, as it represents one measure of the market's expectation of stock market volatility over the next 30 day period. Near the height of the financial crisis the VIX reached 80. Today, the VIX is in the mid-20s. Retail investors can invest in volatility through the iPath S&P500 VIX Short Term Futures ETN (NYSEARCA:VXX).

I think investors can gauge the level of anxiety in the market from queues from the developed sovereign bond market. The 10-year treasury has breached 1.5%. Investors are now willing to earn less than the published rate of inflation to simply guarantee return of capital.

The yield on the S&P 500 (NYSEARCA:SPY) is 2.2%, whereas the yield on the 10-year U.S. treasury is below 1.5%. I think there is value in holding high-quality U.S. equities as opposed to long dated U.S. government debt. Whereas investors may value the "creditworthiness" of the U.S. government securities, I am concerned about purchasing power preservation. According to the Bureau of Labor Statistics, the U.S. CPI (consumer price index) rose 2.3% over the last 12 months. A CPI of 2.3% indicates that investors in long-dated treasuries are not keeping up with the published rate of inflation.

Conservative investors should focus on equities that provide strong dividend yields and have business models that will allow management to increase dividends over time. Increases in dividends will keep up with inflation and maintain your purchasing power.

Screen Criteria for Buys:

  1. Market Capitalization of greater than $5 billion - focused on large-capitalization equities that have diverse business models.
  2. Price to Earnings of less than 20.0x - focused on inexpensive equities.
  3. Beta less than 1.0x - focused on equities that are less volatile than the overall market.
  4. Dividend Yield greater than 2.5% - focused on equities that will provide current dividend yields of greater than the 10-year U.S. treasury.

Medtronic (NYSE:MDT)

Market Capitalization: $37.2 billion

Price to Earnings: 11.2x

Beta: 0.84x

Dividend Yield: 2.7%

Payout Ratio: 28.2%

Altria (NYSE:MO)

Market Capitalization: $65.0 billion

Price to Earnings: 19.1x

Beta: 0.42x

Dividend Yield: 5.2%

Payout Ratio: 95.3%

Coca-Cola Company (NYSE:KO)

Market Capitalization: $166.2 billion

Price to Earnings: 19.5x

Beta: 0.52x

Dividend Yield: 2.8%

Payout Ratio: 37.1%

Southern Company (NYSE:SO)

Market Capitalization: $40.0 billion

Price to Earnings: 18.6x

Beta: 0.28x

Dividend Yield: 4.3%

Payout Ratio: 75.7%

Molson Coors Brewing Company (NYSE:TAP)

Market Capitalization: $6.9 billion

Price to Earnings: 10.5x

Beta: 0.77x

Dividend Yield: 3.3%

Payout Ratio: 34.7%

Disclosure: I am long MDT, TAP, MO.