Jeremy Siegel, a Wharton School of Business professor wrote an essay entitle ”Bond Risks and How to Beat Them”. Answering critics to his earlier op-ed piece The Great American Bond Bubble in WSJ, he defended that his position that at today’s prices, investors in government bonds resembles the tech stocks at the top of technology bubble a decade ago. He pointed out that unlike treasury-bond, mutual funds investing in treasury-bonddo not guarantee principals. Funds will lost a large a amount of money short term easily if the interest rates rise, and interest rates will rise. Individual investors should not count on their capability of sell before the rates rise either as that is simply not a game one can play with the professional bond traders and win.
As an alternative to investing in the bond funds, Professor Sigel advised the following strategy:
Go stock, young man! So says the professor.
As an alternative to investing in the bond funds, Professor Sigel advised the following strategy:
Given the extraordinary low interest rates on bonds, I believe that stocks with earnings that comfortably cover their dividends will be the best investment. Currently many large U.S. and international firms fit that bill. The 10 largest US dividend payers -- AT&T, Exxon Mobil, Chevron, Procter & Gamble, Johnson & Johnson, Verizon Communications, Phillip Morris International, Pfizer, General Electric, and Merck -- sport an average dividend yield of 4%, approximately three percentage points above the current yield on 10-year TIPS and one and one-half percentage points ahead of the yield on standard 10-year Treasury bonds. Their average price-earnings ratio, based on 2010 estimated earnings, is 11.7, versus 13 for the S&P 500 Index. And their earnings cover their expected dividends by a ratio of more than two to one.
Go stock, young man! So says the professor.
