In August, 2011, just after Standard & Poor's downgraded the United States, I wrote about what I thought would be a nearly once-in-a-lifetime opportunity: The huge quantity of U.S. blue chip stocks whose dividend yields exceeded the payout on U.S. Treasuries.
Turns out it's not even a once-a-year event. Just over nine months later, the phenomenon is more pronounced than ever. And just like last time it seems like a good bet for investors with the guts to buy stocks in the midst of today's turmoil.
To review: In August, 2011, when the 10-year Treasury dipped to a record-low 2.14 per cent, there were more than 200 stocks in the S&P 500 that had a higher yield. Since 110 companies in the index didn't pay dividends, roughly 60 per cent of the ones that did were besting Treasury yields.
Friday, the 10-year Treasury broke below the 1.5 per cent mark. That meant 307 companies in the index had higher yields than the benchmark government bond. With only 400 dividend payers in the S&P 500, that meant more than 75 per cent of them beat the Treasury yield. (Standard & Poor's Capital IQ database produced the results.)
Want to double the Treasuries by buying a stock with a 3 per cent yield or greater? There are close to 150 names to choose from.
Plenty are utilities – Duke Energy Corp., Southern Co., Progress Energy Inc. and FirstEnergy Corp. all yield between 4 per cent and 5 per cent. As they did a year ago, AT&T Inc. and Verizon Communications Inc. make the list, albeit with yields around 5 per cent, versus 6 per cent a year ago.
Like consumer products? Kimberly-Clark Corp., Clorox Co. and Procter & Gamble Co. all yield between 3.5 per cent and 3.9 per cent. So do ConAgra Foods Inc.,Campbell Soup Co. and Kellogg Co.
Unwilling to pay a lot? Nearly 50 of the companies have a forward price-to-earnings ratio of 12 or lower, including General Electric Co., Lockheed Martin Corp., and Molson Coors Brewing Co. Energy giants ConocoPhillips and Chevron Corp. have forward P/Es under eight.
Now, to be fair, last week's market events, a reaction to the very realistic chance for a global recession, do nothing to whet the appetite for the risk trade.
Then again, the S&P 500 declined nearly 13 per cent in just the first 10 days of August, 2011, the last time I talked up the idea of buying U.S. equities for their dividend yields.
The index as a whole is up – still – nearly 9 per cent from those levels. And the specific stocks I threw out as examples of the high yielders have almost universally performed.
At the time, I named AT&T and Verizon, Merck & Co. Inc., Eli Lilly & Co., Exxon Mobil Corp., ConocoPhillips, Archer Daniels Midland Co., and Freeport-McMoRan Copper&Gold Inc.
AT&T and the two Big Pharma companies are up more than 20 per cent; four others are up by double digits. ConocoPhillips trails the index as a whole, and Freeport-McMoRan, wounded by the copper-price collapse, is down by almost a third.
In all, on a price-weighted basis, the stocks have gained roughly 10 per cent in the last 10 months, and three quarters' worth of dividend payments have pushed their total return above 13 per cent.
(Disclosure: I've put some of my own money behind this theory. In my retirement accounts, I have 100 shares of Duke Energy, 200 shares of General Electric, 50 shares of Eli Lilly, and 50 shares of Procter & Gamble.)
Will these dividend payers again produce similar returns? As they say, past performance does not guarantee future results and the global environment seems deeply risky at this time.
Yet while equities could certainly continue their decline, they could also go up, sometimes significantly; it's becoming nearly mathematically impossible for bonds from the most stable countries – the U.S., Canada, Germany – to do the same. And it seems almost certain that inflation will more than wipe out bonds' minimal return.
The price of safety is high. The price of potential equity returns has gotten lower. Choose according to your needs.