Dividends have been topical for some time. Many stock-picking experts (Jim Cramer, for example) have touted dividends during down periods in the market on CNBC appearances and on television shows as a key metric in maintaining some equity investment in an individual investment portfolio. Why? Because bond yields are terrible.
The Federal Reserve has kept its core Fed funds rate near 0% since December 2008. Savers everywhere have seen paltry rates offered by banks, savings banks, and credit unions since on “safe” investment products – money market accounts, CDs, and savings accounts. Hardly rates that will keep building that nest egg for retirement, let alone keep pace with needs for those in retirement.
In addition, while governments like the US as well as in the Eurozone have huge debt levels to fund. Those needs have not pushed interest rates higher because global companies are flush with cash right now and, along with a number of countries, corporate treasurers have been investing their cash in the bond market for safety and soundness reasons. Continued bond demand has kept interest rates low.
Finally, private investors are also seeking safety and continue to push bond prices higher (prices are inverse to yields in the bond market). Private investors remain dubious about the stock market. The “Flash Crash” of May 2010 remains a recent memory and consumers continue to see volatility in stock market prices. Investors remain wary of the old “buy and hold” strategy, and there is frequent discussion of distrust in the markets with every scandal that hits the news – the latest of which might be the “fixing” of LIBOR rates by Barclays Bank and perhaps others.
But, investors might find that some staid US companies provide the yield they seek with relative safety. Dividend yields are well over 3% for many long-standing corporates. Dividends may provide a viable alternative to bond investment. In fact, dividend yields for some companies are higher than bond yields in a reversal to the historical relationship which typically shows bond yields higher than dividend yields.
One such company is Proctor & Gamble, ticker PG. PG is a highly rated (double-A by Moody’s) long-standing US corporate with a strong reputation. While PG has seen some price pressure in its brands across a world-wide market, its 3.66% dividend yield surpasses the yields for bonds with a similar risk profile. PG just increased its dividend payout by 7% in April, marking 56 years of dividend increase.
Another company of interest is consumer products company Kimberly-Clark, ticker KMB. While not as highly rated (single-A by Moody’s), I have personally benefited from the yield posted by this US corporation (3.52%). KMB has paid a dividend for 78-straight years and has increased its dividend for 40-straight years. The stock has been on a tremendous surge in the past several months, reaching 52-week highs several times in the past two months.
I also personally have owned Chevron (CVX). Say what you will about oil companies and the morality of their profits, the company is profitable and provides a current yield of about 3.35%. The company is double-A rated (Moody’s). To own this stock, you need a stomach for volatility. The world energy market is very news-worthy and the stock can be sensitive to headline risk. On a 52-week basis, the stock is up about 3% in price.
Other double-A rated companies (Moody’s) with dividend yields better than 2% include Coca-Cola (KO), Johnson & Johnson (JNJ), and United Parcel Service (UPS).
Most broker websites allow searches based on dividend yield but remember to do your research. High dividend yields may be unsustainable and serve only as an incentive for investment. Look for consecutive years of dividends paid and dividend growth on stable-to-growing earnings. Ratings such as those provided by S&P, Moody’s and Fitch may help you confirm that the company is strong. Also, understand the company and its products/services. The old adage to “invest in what you know” is a good one to keep in mind. Everyone knows disposable diapers and understands a key product of KMB, but do you know the demand for disposable diapers in the global market?
Dividends are a viable option to consider as an alternative or in addition to bond yields in an investment portfolio. Investors who do their research might find that there are strong US companies for investment available in the equity market that offer respectable and reliable yield.