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BONDS OR DIVIDENDS?. Why Have Investor’s Historically Preferred Bonds?. 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).
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Why Have Investor’s Historically Preferred Bonds? • 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)
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)
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)
YIELD OF S&P500 STOCKS vs. 10-YEAR TREASURY YIELD Source: AAII, April 2019
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.
Average Dividend Yield from Indices, as of April 1st,2019 Indexarb.com, April 1st, 2019
10-Year Treasury Yield 2.48 Trading View April 1st, 2019
Historical Comparison: Top 25 Dividend Stocks Q2/2019 vs. 10-Year Treasury Yield 4.24 2.488 Source: Yahoo.com
TOP 25 DIVIDEND PORTFOLIO PERFORMANCE - % RETURN Source: Yahoo Finance
What about Corporate Bonds? CORPORATE BONDS • Nominal yields on Treasuries and corporate bonds have dropped since recession • Maturity timeline required • In 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
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
Key in a Dividend Strategy • Search for companies with strong fundamentals • Select stocks with stable dividend yield and growth • Unlike the bonds that are difficult to price, stocks are much easier to price • Underlying stock offers growth potential • Reinvest the dividends • Quarterly screening process for quality dividend stocks • Combination of high/low dividend yield, high/low dividend growth, and payout ratio
Capital Asset Pricing 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 2013
No strategy can guarantee profit or protect against a loss. Past performance is not indicative of future results.
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