Aaron Katsman 58.
(photo credit: Courtesy)
With global financial markets continuing their volatile ways, many investors
have thrown in the towel regarding investing in stocks and have moved all their
money into bonds.
A recent Reuters article highlighting this trend
reported: “ICI estimates $19 billion has left mutual funds for the year so far
as of the end of August. In September, equity funds recorded their fifth
consecutive month of outflows. For the most part, investors are eschewing stocks
for the perceived safety of bonds and other fixed-income assets, trading the
possibility of high returns for stability. Bond funds took in an unprecedented
$376 billion in 2009 and another estimated $216 billion in 2010 as of the end of
Due to this huge influx of cash being used to buy bonds, bond
prices have skyrocketed, meaning that yields on traditional income-producing
investments such as investmentgrade bonds and deposits are paying next to
nothing (inverse relationship between bond prices and yields).
bonds With rates at record-low levels, corporations have sprung into action
issuing long-term bonds at ridiculously low interest rates. It has gotten to the
point that in many cases, a company’s stock dividend is much higher that the
bond yield of the same issue.
According to J. Alex Tarquino of SmartMoney
Magazine: “Since the crash, of course, investors have sought refuge in bonds of
Taking advantage of that demand, the corporate finance types
at some of America’s best-known companies have sprung into action. McDonald’s
recently sold 10-year bonds at 3.5 percent – a new low for a 10-year
investment-grade bond. Shortly after that, health giant Johnson & Johnson
(keep in mind that JNJ has boosted its dividend for 48 straight years) sold
10-year bonds at 2.95 percent – well below the 3.4 percent dividend yield on
J&J stock. As Microsoft sold 10-year bonds at 3.1 percent, it also boosted
its stock dividend, bringing the dividend yield to 2.4 percent.
lesson for investors, say some strategists, is to bypass bonds and take a close
look at the stocks of dividend- paying blue-chip companies.
for 1 percent on a threeyear IBM bond when its stock pays a 1.8 percent dividend
and the company has increased its quarterly payout for 15 consecutive years?” In
this interest-rate environment, one should take a long look at dividend- paying
stocks as a way to help lower market volatility and generate income.
are dividends? Dividends are the share of a company’s profits that it decides to
pay to its shareholders. They are an important part of the total return achieved
from investing in stock, in addition to any increase in the share price. While
your principal is at risk if the stock drops, many analysts forecast that the
table is set for dividend stocks to perform well. They point to relatively high
dividend yields and that they believe the stock market is
According to the highly regarded Bespoke Investment Group:
“Priceto- earnings ratios, a measure of a stock’s value, remain depressed today.
S&P 500 companies are now trading at about 12.3 times estimated 2011
earnings, according to Thomson Reuters data. Since 1960 the price-to-earnings
ratio has been about 16.4, which suggests that stocks today are a relative
Not for everyone It’s important to emphasize that fixed-income
investors who try to enhance the income generated in their portfolio solely
through investing in dividend-paying stocks are doing so at their own peril. The
chance that the stock bought drops substantially surely
Stock-market investing is risky, and someone living on tight
fixed income should stick to low-yielding bonds instead of putting principal at
But for investors who have some wiggle room regarding the income
they need to generate to meet their lifestyle, or are looking for an alternative
to a highly volatile portfolio, dividend- paying stocks in this current
environment are awfully firstname.lastname@example.org
Katsman is a licensed financial adviser in Israel and the United States who
helps people open investment accounts in the US.