In case you missed it, Pimco bond chieftain Bill Gross crossed
asset lines last week and declared "the
cult of equity
is dying" given souring investor sentiment, and poor
But he wasn't exactly talking up his own book. Gross was even
more dour on bonds. While he proposes a 4% nominal return for
stocks going forward, he's looking at 2% for bonds.
"With long Treasuries currently yielding 2.55%, it is even
more of a stretch to assume that long-term bonds - and the bond
market - will replicate the performance of decades past."
Gross is referring to the fact that over the past 30 years
bonds have enjoyed an epic ride down. That fueled strong capital
appreciation for bond investors. (Bond prices rise as yields
fall.) Going forward there's not much room for rates to fall
further reducing the probability of any extended capital gains
from this point forward.
30-Year Treasury Bond Yield
The higher probability is we'll see bond price declines once
interest rates begin to rise. That should have been the bigger
headline, given the fact that ever since the financial crisis,
massive inflows into bond funds and ETFs and large outflows out
of stocks has created a dangerous cult of equity.
What's an investor to do?
While Gross' stock prognostication dominated the headlines,
it's his take on bonds that should carry more weight. That's his
wheelhouse. Stock calls?
No so much.
"As the folks at Fortune note, "the researchers at Birinyi
Associates compiled more than a decade of Gross's stock calls,
and it's not pretty."
Besides, if Gross foresees a 4% nominal return for stocks
going forward, it seems like savvy investors can best that by
focusing on dominant market players with a history of consistent
dividend payouts. Right now the S&P 500 stock index has an
aggregate yield of around 2%, but plenty of multinationals -
Johnson & Johnson (
), Exxon (
), Kimberly Clarke (
), Intel (
) -- have dividend yields well above that.
JNJ Dividend Yield
If you are nailing a nominal return of 3% or higher just from
the dividend alone, it doesn't seem like a stretch that your
total return will exceed 4% over the long run. Moreover, that 3%+
dividend yield is 50% more than what Gross pegs as a target
nominal return for bonds.
The challenge for investors is to a) make sure that a company
has a commitment to dividend growth -- that's what gives you some
nice inflation protection. And b) make sure you're not paying up
for the dividend by getting in at a high valuation -- exactly
are getting caught with in the utility sector.
To nail the dividend consistency, you can check out a
company's history of dividend growth coupled with its payout
ratio (available on YCharts Pro.) The lower the payout ratio the
better; it signals the company has breathing room to keep
increasing the payout. To measure valuation, you can start with a
stock's price-earnings ratio. As a benchmark, the S&P 500
index has a current PE ratio of 13.
Here's how Intel shakes out:
INTC Dividend Yield
A 3.5% yield from a company that has a nice history of
increasing its dividend, yet still has a payout ratio below 30%.
Meanwhile, it currently trades at a below-market
Exxon-Mobil is another example of a solid dividend payer with
XOM Dividend Yield
Regardless of what happens to the over-arching cult of equity,
with some thoughtful research it's not terribly hard to find
dividend-payers selling at compelling valuations that sure beat
the current cult of bonds.
Carla Fried is an editor for the
YCharts Pro Investor Service
which includes professional