Investors have traditionally bought stocks for their growth potential and bonds to get income. These days, though, that strategy has been somewhat turned on its head, as both fear and Federal Reserve intervention have driven bond yields down to incredibly low levels.
With even the 30-Year Treasury bonds recently offering pitifully low 3.1% yields, you can even find a handful of stocks these days that offer a spectacular combination of:
- Paying larger dividend yields than the interest rates on Treasury bonds.
- Having a history of raising those dividends.
- Showing the potential of continuing to raise those payments over time.
When compared to the lower yielding, static payment amounts of those 30-Year Treasury bonds, these particular stocks can offer tremendous benefits for income-oriented investors.
Who has the right stuff?
Despite higher yields, there really aren't many companies that are worth buying for income in lieu of bonds. After all, the lower yields on the Treasuries reflect the fact that those bonds carry a guarantee of repayment that no stock could ever match.
Those that may be worth owning, however, share the following additional characteristics, above and beyond their current yields:
- A payout ratio below two-thirds of earnings, which indicates that the company has legitimate earnings power behind those payments.
- A decent historic dividend growth rate, which shows that the business has a decent track record of directly rewarding its shareholders as its operations improve over time.
- A reasonable estimated future growth rate, which provides a reason to believe that those dividends can both continue and increase into the future.
That's a fairly high hurdle to clear, and I didn't find many companies that were able to do so. But the 10 companies in the table below did, while still having larger current yields than the 30-Year Treasury bond:
| Company | Current Yield | Payout Ratio | 5-Year Dividend Compound Growth Rate | Estimated Future Growth Rate |
|---|---|---|---|---|
| Greif (NYSE: GEF ) | 3.4% | 42.2% | 25.5% | 9.0% |
| Lockheed Martin (NYSE: LMT ) | 5.2% | 34.9% | 20.1% | 8.8% |
| Williams Cos. (NYSE: WMB ) | 3.2% | 38.5% | 14.5% | 12.2% |
| Intel (Nasdaq: INTC ) | 3.4% | 30.8% | 13.9% | 10.6% |
| ConocoPhillips (NYSE: COP ) | 3.7% | 32.1% | 12.7% | 6.2% |
| Maxim Integrated Products | 3.3% | 49.8% | 10.1% | 11.4% |
| Campbell Soup | 3.4% | 47.0% | 9.7% | 5.2% |
| Waste Management (NYSE: WM ) | 4.3% | 64.7% | 9.2% | 10% |
| Sempra Energy | 3.6% | 31.2% | 9.0% | 7.7% |
| Sysco (NYSE: SYY ) | 3.8% | 52.3% | 8.9% | 7.6% |
Source: S&P Capital IQ, as of Nov. 13.
So what?
Nowadays, Treasury bond yields are so abysmally low that you're actually taking on substantial long-term inflation risk by buying them. Over the past year, the official inflation level ran 3.9%, well above what 30-year Treasuries currently yield. In essence, if inflation remains at that level, you're guaranteed to lose purchasing power by buying those 30-year Treasuries -- even if you reinvest every dime you receive as interest.
With those particular stocks, however, not only are you getting current yields above U.S. government debt, but you're also getting a decent potential growth to that income, as well. Take Waste Management, for instance -- the company has grown its dividend at a better than 9% annualized rate over the past five years and looks capable of keeping that trend going. After all, who doesn't use trash and/or recycling services?
Sure, any one of these companies is at a larger risk of reducing its payment than the government is of stopping payment on its Treasury bonds. But with a long-term perspective and a diversified portfolio among the stocks with similar characteristics, are the risks really any worse than owning Treasuries and their virtual guarantee to lose ground to inflation? With the stocks, you at least have the chance to keep your purchasing power over time, through the potential growth in the dividend and share price.
Pick your risks
It's unfortunate, but also the current reality, that investors are paying a very dear price for the perceived safety of bond income. As with most things in the market, that dear price is itself creating long-run risks. These risks can only be mitigated for income-seeking investors by thinking -- and investing -- outside the bond box.
If you want to find other strong companies whose shares look capable of meeting your income investing needs, click here to get a free Motley Fool report with more rock-solid dividend stock ideas in it. You just might find those dividends to be your best shot of getting cold, hard cash from your portfolio in today's market.
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