Jeremy Siegel Slams TIPS, Recommends Dividend-Paying Stocks

Wharton professor warns of reinflated bond bubble, offers advice on defensive positions

Jeremy Siegel, a Wharton professor and frequent industry lecturer, took to the pages of The Wall Street Journal on Monday to warn of the dangers of the Treasury bond market.

In an op-ed co-authored by Jeremy Schwartz, director of research at ETF provider WisdomTree Inc. (where Siegel is a senior advisor), he writes dividend-paying stocks, backed by record amounts of cash, are a wise defensive move in light of the current environment.

“Long-term rates did in fact rise sharply last fall, but recently, on the heels of the economic slowdown and the Federal Reserve's 'pledge' to keep interest rates low for the next two years, U.S. Treasury rates plunged to even lower levels than last summer, reinflating the bubble to the bursting point,” the authors write.

They take particular umbrage with the Treasury Inflation Protected Securities (TIPS) market, writing that recent yields “should be enshrined in Ripley's ‘Believe It or Not!’”

“The yield on the benchmark 10-year TIPS turned negative for the first time in history, meaning investors are now lending money to the government with the hope of receiving a sum 10 years from now that is worth less in purchasing power than the dollars they fork over today. This astounding situation can only be justified by extraordinary pessimism about the prospects for the U.S. economy.”The authors note that prior to the recent recession, there were only five years in the history of the S&P 500 when dividends declined. They add the maximum yearly decline was just 3.3%.

“Despite the recent surge in bond prices and fall in the stock market, portfolios of dividend-paying stocks that we recommended a year ago have matched the returns of both the standard and inflation-protected Treasury 10-year bonds. We believe that when investors awake from their depressed state, they will realize that they don't have to lend the U.S. government money for 10 years at a negative real yield.”

Their conclusion?

“Despite the sluggish economy, the corporate sector is churning out record profits and increasing dividend payments. We believe dividend-paying stocks are the answer to a Treasury bond market that looks more dangerous than ever.”

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