The record low interest rates that have made Federal Reserve chairman Ben Bernanke persona non grata at AARP gatherings (you try to live on a fixed income when bank deposits are paying out less than 1%.) are garnering major huzzahs from corporate CFOs. Let's just say now is in incredibly great time (that's code for c-h-e-a-p) to float some bonds.
You have to look no further than the epic fall in the 10-year Treasury rate to get a sense of what's going on. On May 30th, that payout sank to 1.74%, about one-third of where it was pre-crisis.
10-Year Treasury Rate data by YCharts
That's translating into some super sweet bond deals for corporate issuers:
International Business Machines (IBM) recently raised $1.5 billion with a 3-year bond that pays a-wait for it-0.55%. That's not a typo.
McDonald's (MCD) was able to raise $400 million for a 7-year bond that carries a barely-there 1.875% yield.
Coca-Cola (KO) took advantage of the Bernanke put in March, selling $1 billion in a 3-year bond with an 0.75% payout.
Colgate-Palmolive (CL) got the bond geeks gawking in early May when it managed to float $400 million in a 10-year issue that will cost the consumer product giant a mere 2.3% in annual interest.
Glaxo SmithKline (GSK) issued $5 billion in May that includes a 3-year tranche paying 0.75%, 5-year bonds paying 1.5% and a 10-year slice that will cost the global pharma 2.85%.
You get the idea. And to be fair, it's not just the Bernanke put at play here. It's the fact that risk-averse investors are clamoring for bonds and shunning stocks. Since 2008 stock mutual funds have had net cash outflows of $400 billion, while bond funds have taken in $800 billion. With that sorta demand corporations don't exactly have to entice borrowers with juicy rates.
But what's a no-brainer for the CFOs is a bit of a sucker bet for unwary investors. Sure, there's peace of mind sinking some money into a corporate bond from a blue-chip multinational. But that peace of mind has a steep price. The current inflation rate is 2.3%. If your bond is paying less than that, you're losing purchasing power, plain and simple. Among the bonds listed earlier, only the 10-year bonds manage to (barely) keep pace with inflation. And good luck to you if you think Colgate's 2.3% or Glaxo's 2.85% is going to keep you ahead of inflation over 10 years.
If you're looking for income, the smarter gambit is to look at a blue-chip's stock dividend, not its bond offerings. Chances are you'll pocket a higher current yield from the dividend payout:
IBM's bond yield: 0.55%. It's dividend yield:
IBM Dividend Yield data by YCharts
McDonald's bond yield: 1.875%. Its dividend yield:
MCD Dividend Yield data by YCharts
Colgate-Palmolive's bond yield: 2.3%. Its dividend yield:
CL Dividend Yield data by YCharts
Glaxo-SmithKline's 10-year bond yield: 2.85%. Its dividend yield (for the ADR):
GSK Dividend Yield data by YCharts
Now of course, stocks are way more volatile than bonds. So to state the obvious, money you need to cover next month's mortgage doesn't belong in stocks. But if you're sinking long-term investments in corporate bonds, you really might want to check out the stock instead. It's not just the higher current payout that should look enticing. Find a company with a rising dividend and you've got yourself some nice inflation protection.
As an example, take a look at Coca-Cola's per-share dividend payout over the past 10 years.
KO Dividend data by YCharts