I’m seeing smart money in the bond market selling on rallies and not doing a whole lot of buyi...
Why Dividend Stocks Trump Treasuries
05/23/2012 7:00 am EST
Getting yield via the right blue chips is preferable to bonds these days, argues Glenn Guard. He also tells MoneyShow.com why he likes individual bonds rather than bond funds.
Kate Stalter: I’m speaking today with Glenn Guard, director of investment management at Campbell Wealth Management.
Glenn, a big topic on many investors’ minds as we’re speaking today is potential downsizing of the Eurozone, and what the global impact might be. You remain bullish about the US. So specifically, where do you see strength in the US?
Glenn Guard: That’s a very good question, Kate. Now, we have to remember that this is a global economy. Only half of the S&P’s earnings are generated inside the United States. The other half is generated elsewhere.
We also have to remember that the world economy is growing about 3.5%, most likely, this year, according to the IMF. So while there is certainly a lot of bad news in Europe, especially with Greece, Portugal, and Italy, as well as Spain, I think it’s important to realize that that’s one part of the world, but it’s certainly not the whole world.
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Kate Stalter: When it comes to the US, then, how would you see that playing out for investors here?
Glenn Guard: When you look at labor’s share of income, that’s an economic term. What it essentially means is what the employees—take all the employees of the United States, take all the corporate profits of the United States. What is labor’s share? What are the employees’ cut of those profits?
When you look at the data, Kate, actually it’s pretty interesting. We’re at historic lows, when you look at labor’s share of income.
So what does that mean? If you’re a Marxist, you would say, “Wow, corporations are holding all this money and not giving it to the workers.” If you’re a free-market capitalist like myself, you say, “Wow, look at all that capital waiting for clarity from Washington.” You look at corporate balance sheets, they’re in fantastic shape. You look at unemployment, it’s ticking down. I’m very bullish.
Kate Stalter: It also seems that when people make the Marxist calculation you were mentioning there, they seem to overlook the fact that many of these blue chips, many of these corporate entities—they are held in the retirement accounts of the working people across America. Do you agree that that would be the case?
Glenn Guard: Absolutely. The US stock market is still up about 7% to 8% this year, which is very good. When you look at stocks in general, especially the dividend-paying stocks of high-quality global companies, it’s very attractive yields right now.
Kate Stalter: Give us a few examples of some of these that you like right now.
Glenn Guard: Sure, maybe if I can back up and kind of talk about bonds versus stocks, because I think this would make a lot of sense.
Let’s say you have ten years and you have $10,000. You don’t need that money for ten years. You can buy a ten-year Treasury today, a ten-year Treasury bond from the US Government. It’s going to pay you about 2%. Guaranteed to get your $10,000 back, guaranteed to get your 2%. It sounds great, except inflation is going to be more than that.
So in real terms, in my opinion, you’re actually going to lose money in terms of purchasing power if you buy US Treasury today. That, in my opinion, is irrational. It’s irrational for a ten-year Treasury to yield below inflation. Therefore, what is the key word in a bubble? The key word, of course, is irrational.
I would argue that the bond market, in fact, is in a bubble today. I have no idea when the bubble will pop, and I have no idea if it will be orderly or disorderly. So I think I have established that most investors probably would do better by avoiding bonds, or most bonds.
So where do we find the value? Well, today you can buy Procter & Gamble (PG) stock. The stock is yielding about 3.1%. The dividend yield is 3.1%, so you’re already getting a return better than what you can get with the Treasury.
Additionally, Procter & Gamble has raised its dividend each and every year over the last 55 years. They raised it in the middle of the financial crisis. In my opinion, they’ll continue to raise it.
They’re selling detergent to the Chinese, they’re selling toothpaste to the Brazilians, they’re in every major market in the US. They’re a global company. So with companies like Procter & Gamble:
- you’re going to get capital appreciation
- you can probably get a better yield than what you can get with bonds these days.
Kate Stalter: Now, obviously that’s one of these main consumer staples companies. Is that the sector that you would be gravitating toward right now?
Everybody is looking at tech, with the Facebook (FB) IPO—obviously not for a dividend play, but nonetheless it’s getting a lot of attention right now. So I’m asking: Are there other sectors that you like at this moment?
Glenn Guard: Absolutely, I think tech is very attractive in certain areas. One stock I like is Intel (INTC). It’s yielding about 3% right now. They have an 80% market share of the semiconductor space.
And really, it’s a play on a couple of things. It’s a play on global GDP growth and this emerging middle class of folks who are buying a computer for the first time. I think Intel is very well positioned to capitalize on that long-term trend…and they’re paying you 3%.
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Kate Stalter: Let me come back to what you were talking about a moment ago, about the irrationality of investing in the bond market, as opposed to equities.
As you’re speaking about some of these yields in equities: In some of the recent market downturns—in the past decade or so, there have been some pretty big ones that are fresh in people’s minds. Is that pushing people, perhaps, towards fixed income because they’re a little bit gun shy about the equity market?
Glenn Guard: Absolutely, Kate, there’s no question in my mind. I hear that from clients every day. We have a lot of folks who are shell-shocked over the last ten years.
We’ve had two major market meltdowns. If you look at the stock market, the ten-year period ending March 2009…so take the stock market’s performance from essentially 1999 to March 2009, and it’s the worst ten-year period in stock market history.
So certainly, there are a lot of Baby Boomers out there that are looking to retire, and they’re very, very nervous about putting any money to risk. My view, and what I tell clients is, that you need to have purchasing power in your retirement.
I would argue that it’s far riskier to own a bond fund today than it would be to own a well-diversified stock fund, in terms of purchasing power. So I turned it on its head and said, “Look, bonds are far more risky than stocks, especially a bond fund.”
Kate Stalter: Why would that be? Why a bond fund is the riskiest?
Glenn Guard: Kate, that’s a great question. We talk about this a lot, and this is something I’m really concerned about. I don’t think the average investor has really focused on this.
A bond fund doesn’t mature. If you buy a bond itself, you can hold it to maturity, and usually you get your money back if it’s a good bond. You get all your money back plus interest. So you don’t actually lose any money in real terms.
Of course, we talked previously, you might lose money in terms of purchasing power, in terms of what you can actually buy with that money at the end of the day. But you’re not going to lose money in absolute terms.
Now the problem is that bond values go down when interest rates go up. I believe that interest rates are going to go up, and I can go into length about why I think that’s going to happen over the next five to ten years.
So if you own a bond fund, the bond funds never mature. Your bond fund will go down in value, and there’s no guarantee that it will ever come back in value. It’s not like a principal thing. A bond fund is constantly buying and selling bonds to manage the portfolio.
I think it’s very important that investors realize that a bond fund is not as “safe” as holding actually bonds in your portfolio. Quite frankly, I think that investors need to look at other kinds of asset classes to diversify, to try to get some safety of principal as well as capital appreciation if they’re going to do well in retirement.
Kate Stalter: Last question today. Let me just follow up on your remark that you believe interest rates will be rising. Say a little bit about that.
Glenn Guard: Sure. Ben Bernanke is buying about 60% of the Treasuries, last time I heard, that are coming to market. That by itself is keeping interest rates artificially low. He’s doing that on purpose, of course, to keep interest rates low so that corporate America can borrow money at a good rate, so they can expand and get the economy going.
Certainly a noble motivation, but the bottom line is someday he’s going to stop doing that. I don’t know when he’s going to stop doing that and neither does he, but someday he is going to stop doing that.
Remember, it’s supply and demand. If all of a sudden someone who is buying 60% of the Treasuries stops doing that, there’s going to be less demand for the Treasuries. If there’s less demand for the Treasuries, their values will go down.
Remember as the bond value goes down, the interest rate goes up. So therefore, I’m highly confident that interest rates are going to be higher than they are today within three years, and they could go up pretty substantially.
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