The grand sum of $1.4 trillion is a remarkably large number, no
matter how you slice it. It's so large that it can single-handedly
impact the direction of the stock
. And thanks to recent events, it is a number you should be
That huge sum of the money is the amount that has been shifted
from stock funds to
funds during the past five years. It's a fairly historic shift, but
may likely have run its course. History tells us so.
Rising rates = rising risk
Over the past century, investors have poured into
during periods of severe economic crises that were often associated
and higher interest rates. The most recent bond rally, back in the
1970s, was a perfect example. A lengthy period of stagflation
pushed rates toward (and eventually past) the double-digit mark on
the heels of anemic economic growth and rising inflation. Many
investors came to the same conclusion: who would want to own stocks
when a risk-free bond can deliver 7%, 8% or even 10% annualized
Fast-forward to 2012, and history has been turned on its head.
Bonds are rallying even though inflationary pressures are virtually
non-existent. Still, global investors have become so wary of stocks
that they are increasing their exposure to bonds, even though they
carry insulting yields. In Europe, German 10-year bonds are
yielding just 1.5%, which could turn out to be a
for non-European investors if predictions of a further drop in the
euro come true.
Here in the United States, our own 10-year
are heading down a similar path. The
, which has quickly plunged toward the 1.5% mark, is actually
negative when adjusted for inflation.
Remember that $1.4 trillion figure noted earlier? That's a key
factor behind the absolute plunge in rates. As money has poured
into bonds, rates have sunk ever lower. Frankly, all those
investors pouring into bonds have proven to be quite prescient. As
bond yields have fallen, bond prices have risen. In fact, bond
funds have turned out to be strikingly good investments in the past
year as European economic concerns swelled. Want to see a great
52-week chart? Check out the
iShares Barclays 20+ year
Yet here's the rub. With yields already so low, and such strong
gains in bond prices already in hand, it's simply unrealistic to
expect further gains. Instead, even as it's awfully scary out
there, it's time to walk away from the perceived safety of
This isn't an argument to simply flee toward all kinds of stocks,
especially if you suspect the economic picture will get worse
before it gets better. But one class of stocks matches up quite
well with bonds, and now looks to deliver far more robust
I'm talking about thedividend stocks.
Many of these income-producing stocks have been punished in this
market (albeit to a lesser extent than stocks that carry no yield),
and as stock prices have fallen, dividend yields have risen.
Just three months ago, before the stock market swooned and bond
prices staged yet another rally, several of my colleagues at
StreetAuthority began to discuss an unusual anomaly in the market:
Dividend yields for stocks in the S&P 500 were higher than the
yield on 10-year T-bills. That has not happened very often in the
Now, there's no comparison. The average
on S&P 500 stocks is now 50% higher than the 10-year yield,
which is virtually unprecedented. As long as you focus on companies
that have a history of maintaining or boosting their
, it's very hard to see how you won't make more money in these
stocks than in bonds right now. In fact, many of these same
companies have downside support in terms of solid cash balances,
and recurring revenue streams. At the same time, a host of factors
are in place to cause bond investors to suffer major losses. These
• Long-awaited inflationary pressures that result from the
Federal Reserve's massive
• Signs that the U.S.
may look healthier in 2013 or 2014
• An inability for policy makers in Washington to agree on
a way to avert the looming "fiscal cliff" that leads foreign
investors to sharply cut their exposure to the U.S. economy through
their bond holdings.
Safe and growing
A longstanding investment strategy is to find companies with a
history of stable and growing dividend payouts in any climate (In
fact, it's a cornerstone of Amy Calistri's
Frankly, I tend to shun stocks that sport dividend yields of less
than 2%, only because you can usually do so much better than that.
Many companies have historically sought to have dividend yields in
the 2% to 3% range, though a combination of rising cash flow and
falling stock prices has unwittingly pushed these stocks into a
higher-yield threshold. Of the 1,500 companies that make up the
S&P 500, roughly 22% of them (or 335) now yield more than 3%.
That's roughly twice the payout of the 10-year Treasury.
Many companies now realize how important it is to return cash
flow to shareholders in the form of dividends. In fact, of the 335
stocks noted above, about 20% of them have boosted their dividend,
on average, at least 10% annually over the past five
I've taken things a step further, focusing on those recent bold
dividend hikers, and looking at only those that have raised their
dividend annually for the past decade. Good times or bad, rain or
shine, hell or high water, these dividend payouts keep
Excluding defense contractors such as
Lockheed Martin (
Northrup Grumman (
, all of which may need to cut their dividend if defense spending
shrinks, I found 17 stocks that have stable and growing dividends
and yield at least 3.5%...
Risks to Consider:
These companies boosted their payouts in 2008 and 2009, even as
the economy slumped, but any possible deeper slump in the quarters
ahead would cause these payouts to at least be frozen.
Action to Take -->
If you've made a fortune in bonds, then you need to see the reasons
why further gains will be hard to achieve. The stocks in the table
above bring the income stream stability of bonds -- with much
If you believe like me that the bond rally is over, then you simply
MUST look for other options for income. Amy Calistri's
strategy is quite possibly the best way I've seen for investors to
invest in solid dividend-paying stocks and collect regular, monthly
paychecks. To learn more about how Amy used this strategy to
collect $1,357.52 in income in one month,
(you won't have to sit through a long video).]
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.