Income Investors Should Still Be Buying Equities

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 |  Includes: CVX, DD, HD, INTC, JNJ, KO, MCD, MDLZ, MRK, PFE, PG, T, VZ, XOM
by: Paul Price

A bit more than two years ago I published the original version of this viewpoint here on Seeking Alpha. I strongly urged income seekers to eschew bonds with 5-year Treasuries yielding 1.7576% and 10-year T-bonds coupons at 2.9955%.

I listed the 14 stocks in the DJIA that had current yields higher than the 10-year rate. An equal dollar weighted portfolio of those equities had a current yield of 4.18% as of July 16, 2010.

Because I was focusing strictly on the income component I didn't even go into the possibilities for capital gains on top of the yield advantage. Now, 24.5 months later, I'd like to update that aspect. All prices are apples to apples comparisons.

Company

Jul. 16, 2010 Price

Jul. 30, 2012 Price

Cap. Gain / (Loss)

Verizon (NYSE:VZ)

$26.69

$44.95

68.4%

AT&T (NYSE:T)

$25.00

$37.43

49.7%

Pfizer (NYSE:PFE)

$14.87

$23.71

59.4%

DuPont (NYSE:DD)

$35.98

$49.67

38.0%

Merck (NYSE:MRK)

$35.91

$44.48

23.9%

Kraft (KFT)

$28.81

$39.50

37.1%

Chevron (NYSE:CVX)

$71.50

$109.82

53.6%

Johnson & Johnson (NYSE:JNJ)

$59.44

$69.45

16.8%

Home Depot (NYSE:HD)

$27.11

$53.25

96.4%

Coca Cola (NYSE:KO)

$52.37

$81.12

54.9%

McDonalds (NYSE:MCD)

$69.94

$89.33

27.7%

Procter&Gamble (NYSE:PG)

$61.99

$65.10

5.0%

Intel (NASDAQ:INTC)

$21.02

$25.76

22.5%

Exxon Mobil (NYSE:XOM)

$57.96

$87.56

51.1%

Average Gain on Equal Dollar Weighted Portfolio

43.2%

Click to enlarge

Somewhat surprisingly, there were 14 out of 14 winning positions for an average gain of over 43%. Add in the starting yield of 4.18% (x 2-years) and you had a 24.5 month total return of 51.56%. This understates the actual returns as it ignores interim dividend increases.

Today, the 5 and 10-year Treasury yields to maturity are even lower at 0.61% and 1.50% respectively [source: Bloomberg].

Taking into account dividend increases, as well as price changes since July 16, 2010 the current yield on the identical, equal dollar weighted portfolio, set up today would be 3.36%. That's much better than it was two years ago on a 'relative to fixed-income' basis.

I updated the original list to reflect an additional two years of dividend changes. Thirteen of the fourteen companies raised their dividends since my original article. Kraft was the only laggard - it simply held its rate steady.

Over the past dozen years the whole group increased their collective payout by 313.8%. Sticklers may want to point out that MCD and INTC started at very low levels making for skewed results. If you completely throw out those two outliers you still saw a 177.6% improvement to your income.

(click to enlarge)Click to enlarge

The period since my first article was one of the most volatile in memory. In fact, the S&P 500 was lower in October 2011 than it was at the starting point more than 14 months earlier.

(click to enlarge)Click to enlarge

The world was crazy back in summer 2010. It was bonkers in August - October 2011. Despite all that investors who simply turned off the news and sat tight ended up outperforming risk-free assets by almost astounding percentages.

My advice today is the same as it was in 2010. Income investors should be buying equities.

Disclosure: I am long XOM.