Slipping quality, miniscule returns—emerging market banana republic? Actually, U.S. Treasury bonds.
SmartMoney’s Jack Hough writes that “investors already had two good reasons to lighten up on Treasuries. This week they got another.” And he names four companies that are stable and pay nice dividends.
The first reason to back off bonds is a puny payoff, according to Hough.
“The 10-year Treasury note recently yielded less than 2%, or less than one-third of what it has paid, on average, over the past half century.”
The second is slipping quality. As Hough reminds readers, Standard & Poor’s lowered its rating on the U.S. government to double-A+ from triple-A in August, around when Moody’s confirmed its triple-A rating but attached to it a “negative outlook”.
“This week, a congressional ‘supercommittee,’ considered by many the best hope for a broad deficit-reduction deal, announced its efforts had come to nothing,” he wrote last week. “Financial markets responded in almost comical fashion: with a plunge in stock prices and a rush to U.S. Treasuries. Treasuries, after all, provide unmatched ‘liquidity’—a nice way of saying that America’s debt is larger than just about any other financial instrument investors can cram into.”
Yield-hunters and safety seekers can do better, often by making the same investments. Hough names four American firms which still have perfect credit ratings from both agencies: Microsoft (MSFT), Exxon Mobil (XOM), Johnson & Johnson (JNJ) and Automatic Data Processing (ADP). Their shares carry an average dividend yield of more than 3%.
A comparison of Treasury bonds to dividend-paying stocks isn’t an apples-to-apples one, Hough notes. Credit ratings apply to bonds, which represent payment promises, not stocks, which represent shared participation in profits. In general, bond payments are safer than dividends, because the latter can be cut without triggering a default.
“But three of the aforementioned companies are designated by Standard & Poor’s as ‘Dividend Aristocrats’, meaning they’ve increased their dividend payments for at least 25 consecutive years. The fourth, Microsoft, is a little young to be an Aristocrat, but it has steadily increased its dividend since it started making payments in 2003. In September, Microsoft’s board of directors approved a 25% dividend hike.
“On average, the four companies pay 38% of their profits out as dividends.”