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Yield vs. Yield: Why Bonds and Dividend Stocks Are Not Interchangeable

9/23/2010 4:41:00 PM
By: SeekingAlpha
Roger Nusbaum submits:


Carrying out the thought a little further, fixed income yields are at all time lows or close to it, while the S&P 500 is 27% below its 2007 peak and 25% below its March 2000 peak. It would be tough to argue that stocks aren't relatively cheaper than bonds--I've been writing for ages that I think bonds are way overpriced and so have been keeping maturities very short and obviously bonds, or anything for that matter, can stay very expensive for a long time and stocks can stay "cheap" for a long time.

So the market is at a point where there are plenty of well run, fundamentally sound companies with high dividend yields such that an investor spending a decent amount of time looking for names could construct a portfolio whose yield was higher than, or at least competitive with a high quality bond portfolio.

The group covers a lot of ground and depending on how someone might blend them together--note not all of the big SPX sectors are included--the yield could be 5% overall without whoring out to a bunch of companies with lousy stats, in my opinion, but you can draw your own conclusions.

The above mix actually could be a pretty good start to building an equity portfolio for someone but the key is equity portfolio. MXIM dropped about 60% from peak to trough but that was right in line with the iShares Semiconductor ETF ( IGW ). LLY did a fair bit worse than the Health Care Sector SPDR ( XLV ) on the way down, dropping as much as 50%, and at the start the market's snap back but has outperformed by a little in the last year. T has done a little better than the iShares Telecom ETF ( IYZ ) fairly consistently but it did drop 40% at its trough. Eni dropped almost 60% but that was much better than the iShares Italy ( EWI ). BPT did much better than the Energy Sector SPDR ( XLE ) which may not be an apples to apples but from its peak about six months after the SPX's peak BPT dropped 50%. Komercni Banka dropped about 60% from its peak, which sounds bad but the Financial Sector SPDR ( XLF ) dropped 80% at its worst. Finally MO did a little worse than the Staples Sector SPDR ( XLP ) dropping slightly more than 30%.

The point of that last tedious paragraph is that there is nothing bond-like about those results. Relative to equities, the results above are not bad and you may agree with that or disagree but again there is nothing bond-like about them. After two 50% declines in ten years another one is unlikely (not impossible of course) but even in a normal bear market, like maybe a 30% decline with no reasonable fear of financial Armageddon, the above stocks would still go down plenty even if it were to be less than the market. Down 25% in a down 30% world is a fine equity market result, or not, but again it is not bond-like. For a little bit of context I am talking about individual bonds not bond funds some of which malfunctioned during the crisis and obviously I am assuming, perhaps unfairly, someone avoided financial sector bonds.

As you read more commentaries along these lines it is crucial to understand there is a big difference between buying stocks that probably won't go down as much as the market and buying bonds. A portfolio that only owns stocks like the above should be expected to go down a lot during a bear market even if they were to go down less, a lack of recognition of this ahead of time would likely cause a lot of anguish.

Disclosure: None

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