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
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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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