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BONDS OR DIVIDENDS? Why Have Investor’s Historically Preferred Bonds? BONDS OR DIVIDENDS? Why Have Investor’s Historically Preferred Bonds?

BONDS OR DIVIDENDS? Why Have Investor’s Historically Preferred Bonds? - PowerPoint Presentation

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BONDS OR DIVIDENDS? Why Have Investor’s Historically Preferred Bonds? - PPT Presentation

Traditionally known as a safe investment Typically less volatile than stocks Offer regular interest payments Have first priority in any liquidation The Safer Alternative to Bonds Jim Royal September 2011 ID: 644271

bonds 7021 yield dividend 7021 bonds dividend yield risk stocks portfolio amp 2017 interest information capm rate 2011 business

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Slide1

BONDS OR DIVIDENDS?Slide2

Why Have Investor’s Historically Preferred Bonds?

Traditionally known as a “safe investment”

Typically less volatile than stocksOffer regular interest paymentsHave first priority in any liquidation

The Safer Alternative to Bonds

. Jim Royal (September, 2011)Slide3

Is There Risk With Bonds?

Types of risks associated with bonds:

Interest rate risk, reinvestment risk, inflation risk, credit/default risk, rating downgrades and liquidity risk.

The Safer Alternative to Bonds

. Jim Royal (September, 2011)Slide4

Trends in Bonds

Current trends within the bond environment:

Low interest rates:

Interest rates below the level of inflation, making investors lose purchasing power as bonds decline in value when rates rise again.

100-year bonds:

Although these bonds offer higher interest rates, there is principal and business risk.

Weak bond covenants:

Bond investors may accept weaker lending terms.

The Safer Alternative to Bonds

. Jim Royal (September, 2011)Slide5

YIELD OF S&P500 STOCKS vs. 10-YEAR TREASURY YIELD

Source: AAII, July 2017Slide6

An Investor in Dividend Stocks or Bonds Will Have To Deal With Principle Fluctuations In Either Investment…

So, In This Interest Rate Environment, Which Would You Rather Own, Dividend Stocks or Bonds?

**In Both Cases, The Investor Has To Hold The Investment To Get The Yield.Slide7

Average Dividend Yield from Indices, as of August 2017

Indexarb.com, July 27

th, 2017

Index

Aggregate Value of Index Components

Aggregate Dividends

Dividend Yield (%)

 

 

 

[S&P and Nasdaq in millions.

[Next four quarters]

[Aggregate Dividends divided by Aggregate Value]

Dow Jones in units.]

 

 

 

[S&P and Nasdaq in millions.

 

 

Dow Jones in units.]

 

 

S&P

21,203,230.007

435,897.360

2.06

[Floating Capitalization Weighted: stock price and per-share dividend are multiplied by the number of floating shares and then scaled to millions.]

 

Nasdaq 100

8,431,896.667

96,326.035

1.140

[Modified Cap. Weighted: stock price and per-share dividend are multiplied by the Nasdaq weight factors and then scaled to millions.]

 

Dow Jones

3,170.270

78.522

2.48

[Price Weighted: Sum of prices and dividends of stocks in the DJIA index.

(N.B. Divide stock price sum by the DJIA divisor to get the index value.) ]Slide8

10-Year Treasury Yield

2.33

Yahoo! July 27

th

, 2017Slide9

Historical Comparison: Top 25 Dividend Stocks

Q3-17 vs. 10-Year Treasury Yield

Source: Yahoo.com

4.06

2.29Slide10

TOP 25 DIVIDEND PORTFOLIO PERFORMANCE - % RETURN

Source: Yahoo FinanceSlide11

What about Corporate Bonds?

CORPORATE BONDS

Nominal yields on Treasuries and corporate bonds have dropped since recessionMaturity timeline requiredIn inflationary environment, bonds tend to do poorly.Bond interest is taxed as high as 35% rate

DIVIDEND STOCKS

Dividend yields of high quality equities have risen

Companies with strong balance sheet and stable earnings will sustain in an economic downturn

Equities will hold up much better in an inflationary environment

Current tax rate for qualified dividends is 15% or 0%

Potential for capital growth Advantage of possibly raising current yields over time

Seeking Alpha, June 2011 Slide12

Average yield-to-maturity for bonds= 3.52%, despite having an average coupon of 6.42%

Average dividend yield of the same corporate borrowers is 4.03%

Seeking Alpha, June 2011 Slide13

Key in a Dividend Strategy

Search for companies with strong fundamentals

Select stocks with stable dividend yield and growthUnlike the bonds that are difficult to price, stocks are much easier to priceUnderlying stock offers growth potentialReinvest the dividendsQuarterly screening process for quality dividend stocks

Combination of high/low dividend yield, high/low dividend growth, and payout ratioSlide14

Expected Return on Dividend Portfolio

As of:

8/1/2017

RANK #

TICKER

COMPANY

Growth Score

Yield Score

Dividend Yield

TOTAL SCORE

Beta

Rf*

Rm

CAPM

1

BTI

British American Tobacco PLC (

64.8889

93.00

5.30

78.94

1.04

0.94

0.7021

0.6925

2

MIC

Macquarie Infrastructure Corp

60.0278

95.00

6.80

77.51

0.93

0.94

0.7021

0.7187

3

BGCP

BGC Partners, Inc.

57.1944

94.00

6.10

75.60

1.29

0.94

0.7021

0.6330

4

VLO

Valero Energy Corporation

60.0833

91.00

4.30

75.54

1.22

0.94

0.7021

0.6497

5

LAZ

Lazard Ltd

59.4167

88.00

3.60

73.71

1.84

0.94

0.7021

0.5022

6

KKR

KKR & Co. L.P.

57.7500

88.00

3.50

72.88

1.53

0.94

0.7021

0.5759

7

ORI

Old Republic International Cor

56.6944

89.00

3.90

72.85

1.32

0.94

0.7021

0.6259

8

ENB

Enbridge Inc (USA)

53.5000

92.00

4.60

72.75

0.61

0.94

0.7021

0.7949

9

CSCO

Cisco Systems, Inc.

56.4722

88.00

3.60

72.24

1.23

0.94

0.7021

0.6473

10

GIS

General Mills, Inc.

57.1389

87.00

3.40

72.07

0.61

0.94

0.7021

0.7949

11

GSK

GlaxoSmithKline plc (ADR)

53.0556

91.00

4.50

72.03

1.04

0.94

0.7021

0.6925

12

VZ

Verizon Communications Inc.

50.5556

93.00

5.10

71.78

0.54

0.94

0.7021

0.8115

13

LYB

LyondellBasell Industries NV

51.9444

91.00

4.50

71.47

1.05

0.94

0.7021

0.6902

14

RDS.B

Royal Dutch Shell plc (ADR)

46.6111

96.00

7.20

71.31

1.07

0.94

0.7021

0.6854

15

IP

International Paper Co

53.8611

87.00

3.30

70.43

1.49

0.94

0.7021

0.5855

16

MSFT

Microsoft Corporation

58.5278

79.00

2.20

68.76

1.00

0.94

0.7021

0.7021

17

ABBV

AbbVie Inc

49.0278

88.00

3.50

68.51

1.52

0.94

0.7021

0.5783

18

WFC

Wells Fargo & Co

52.9722

84.00

2.90

68.49

0.95

0.94

0.7021

0.7140

19

GM

General Motors Company

45.1389

91.00

4.40

68.07

1.45

0.94

0.7021

0.5950

20

TEVA

Teva Pharmaceutical Industries

44.5278

90.00

4.20

67.26

0.47

0.94

0.7021

0.8282

21

JPM

JPMorgan Chase & Co.

52.3889

80.00

2.30

66.19

1.19

0.94

0.7021

0.6568

22

WMT

Wal-Mart Stores Inc

49.0000

83.00

2.70

66.00

0.28

0.94

0.7021

0.8734

23

CS

Credit Suisse Group AG (ADR)

38.8056

93.00

5.10

65.90

1.41

0.94

0.7021

0.6045

24

KO

The Coca-Cola Co

39.4167

87.00

3.30

63.21

0.69

0.94

0.7021

0.7758

25

GE

General Electric Company

35.2500

88.00

3.50

61.63

1.22

0.94

0.7021

0.6497

Beta

Rf

Rm

CAPM

Current Portfolio Yield:

4.152

1.08

0.94

0.7021

0.6831%

Per Month

Rf

Treasury Bill Rate - 4 weeks

7/25/2017

CAPM of Portfolio

8.51%

Annualized

Current Portfolio Yield

4.15%

* Growth and Yield Score based on 3Q/2017 Screening

Expected return of the Portfolio

12.66%Slide15

Capital Asset

P

ricing Model (CAPM)

A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities.

General idea behind CAPM: investors need to be compensated in two ways: time value of money and risk.

The time value of money is represented by the risk-free (

rf

) rate in the formula and compensates the investors for placing money in any investment over a period of time.

The risk is represented by beta and calculates the amount of compensation the investor needs for taking on additional risk (risk premium)

The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium.

Investopedia, October 2013Slide16

No strategy can guarantee profit

or protect against a loss.

Past performance is not indicative

of future results.Slide17

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