Sunday, September 25, 2011

Dividends As An Alternative To Low Bond Interest Rates

The low level of interest rates on fixed income investments is forcing investors to consider alternative income sources in their investment portfolio. One income source investors have considered as an alternative is dividend paying stocks. A caveat is stocks have historically been more volatile (standard deviation) than bonds as noted in the below table.

From The Blog of HORAN Capital Advisors

However, given the low level of bond interest rates, the yield on dividend paying stocks is now at its highest level relative to bond interest rates in nearly 50 years.

From The Blog of HORAN Capital Advisors

From a return standpoint, dividends have been a stable portion of equity returns. Dividend paying stocks have also been less volatile than the broader equity market as noted in the first table above.

From The Blog of HORAN Capital Advisors

Lastly, given where bonds rates are today, it is hard to envision rates moving lower over the next three to five years given the state of the U.S. federal budget. Printing currency (higher potential inflation) and devaluing the dollar seems to be a likely path that will be pursued in Washington, D.C. Not if, but when rates turn higher, bond investors are likely to get hurt as bond values contract.

For the dividend stock investor, corporate balance sheets are in pretty good shape with high levels of cash. A portion of these cash balances is likely to be used in increasing dividend payments to the company's equity holders. I suspect these low corporate payout ratios are likely to increase over the next three to five years; thus, providing some income growth for investors.

From The Blog of HORAN Capital Advisors


Generating Income From Stocks
Fidelity Viewpoints
By: Dirk Hofschire, CFA, VP, Asset Allocation Research, and James Morrow, Portfolio Manager, Fidelity Viewpoints
September 21, 2011

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