Itâs a topsy-turvy world right now with short-term interest rates near zero and even the 5 and 10-year treasuries are paying peanuts. As of July 16, 2010 the 5-year note was yielding 1.7576% and the 10-year note was paying 2.9955%.
Thatâs pre-tax. Take away even 30% for combined federal and state taxes and the 5-year comes to 1.23% with the 10-year at 2.10%. Nobody I know believes their own cost of living has been flat to down as the government reports. Take away even 2.5% per year for inflation and both the 5 and 10-year bonds become clear losers in terms of buying power preservation on an after-tax and inflation-adjusted basis.
So whatâs a person to do? Defy conventional logic and âBuy stocks for incomeâ.
Ticker | 7/16/00 Dividend Rate | 7/16/10 Dividend Rate | 10-Year * Div. Growth | 7/16/10 Current Yield | 5-Year Treasury Yield | 10-Year Treasury Yield | |
Verizon | $1.54 | $1.92 | 24.7% | 7.19% | 1.7576% | 2.9955% | |
AT&T | $1.01 | $1.68 | 66.3% | 6.80% | 1.7576% | 2.9955% | |
Pfizer | $0.36 | $0.72 | 100% | 4.95% | 1.7576% | 2.9955% | |
DuPont | $1.40 | $1.64 | 17.1% | 4.56% | 1.7576% | 2.9955% | |
Merck | $1.21 | $1.52 | 25.6% | 4.23% | 1.7576% | 2.9955% | |
Kraft** | $0.54 | $1.16 | 114.8% | 4.03% | 1.7576% | 2.9955% | |
Chevron | $1.30 | $2.88 | 121.5% | 4.03% | 1.7576% | 2.9955% | |
J & Johnson | $0.62 | $2.16 | 248.4% | 3.63% | 1.7576% | 2.9955% | |
Home Depot | $0.16 | $0.94 | 487.5% | 3.47% | 1.7576% | 2.9955% | |
Coca Cola | $0.68 | $1.76 | 158.8% | 3.36% | 1.7576% | 2.9955% | |
McDonalds | $0.22 | $2.20 | 900% | 3.15% | 1.7576% | 2.9955% | |
P & G | $0.64 | $1.89 | 195.3% | 3.05% | 1.7576% | 2.9955% | |
Intel | $0.07 | $0.64 | 814.3% | 3.04% | 1.7576% | 2.9955% | |
Exxon Mob. | $0.88 | $1.74 | 97.7% | 3.04% | 1.7576% | 2.9955% | |
10-Year Average | 240.86% | 4.18% | |||||
Average Excluding MCD and INTC | 138.14% | ||||||
* Cumulative | ** Kraftâs starting dividend rate from 2001 | ||||||
14 of the 30 DJIA stocks now yield an average of 4.18% - well more than the 10-Year Treasuryâs 2.9955% fixed-rate return.
If you lock in that T-bond rate today the best you can hope for is to capture that< 3% interest rate and get your [inflation ravaged] principal back at face value.
$100,000 in 5-year bonds will produce just $1,767.50 in annual income right now.
$100,000 in 10-year bonds will produce just $2,995.50 in annual income right now.
$100,000 equally divided among the 14 listed stocks would provide $4,180 in yearly income at todayâs dividend rates.
Your first yearâs income advantage for stocks versus 10-year bonds would be $1,184.50 or 39.54%. Unlike the fixed-rate T-bonds, the 14 companies have a history of increasing their payouts. Over the past decade they averaged a 240.86% cumulative increase. Even if you âthrow outâ the huge increases from McDonalds and Intel as outliers, the other 12 still went up 138.14% on average over the 10-year period.
You could choose to lock in one of the worst rates in modern history and virtually guarantee a big loss in after-tax, after inflation buying power by owning Treasuries.
Or⌠you could opt for a diversified portfolio of blue chip companies that pay you more income to start and are likely to increase that amount year after year. Unless you believe that America is going down the drain completely I think the correct choice is quite obvious. Even if you do think our country is heading for a âGrecian Formulaâ moment ask yourself, âWhat will the value of the $ U.S. be on world markets if that occurs?â
High quality shares of solid companies are much more likely to hold their value than paper assets backed by a shaky currency.
I know where Iâm putting my money and itâs not into bonds.
Dr. Paul Price
www.BeatingBuffett.com
www.OptionsProfits.com
