As we retire or get closer to retirement, the need to generate investment income takes on a much greater importance. Historically, it was much easier, as one could divert a larger portion of their stock portfolio into bonds, while capturing yields that might vary from 5-10%. Those yields, combined with the nearly 40-year bull market in bonds, led to strong returns for bonds. As I write to you today, the 10-year U.S. Treasury bond is yielding 0.77%. $1MM invested in them would yield just $7,700 per annum. A 1% increase in interest rates would likely result in a roughly 7%, or $70,000 decline. Investment grade and Junk bonds trade off of a spread to Treasuries, so yields are low universally. Getting a “safe” 4% is way more challenging than it has ever been in bonds, and of course this also impacts other products such as annuities that trade off bond spreads.
Fortunately, some stocks offer extremely attractive cash flows and dividend yields that make them a much more attractive option than bonds in the current environment. They can be volatile from time to time as we’ve seen throughout this year but over time those dividends add up and you also have the appreciation potential which is very significant. While most of the money in 2020 has gone towards the giant Tech companies that have benefitted most from lockdown, eventually money will flow to where the income and earnings are generated. The yields on those large cap techs are very low, reflective of the elevated valuations. Below are a few examples of stocks we own and the dividends they offer. Almost everything we own pays a dividend, and most are quite high. Next year, I’d expect stock buybacks to resume as well, which will be enormously accretive to the intrinsic value of the stocks. Historically, that has bridged the gap between price and value for us quite nicely.
1) T $28.32 Dividend Yield 7.27%
2) MO $40.69 Dividend Yield 8.52%
3) C $44.93 Dividend Yield 4.56%
4) AIG $29.95 Dividend Yield 4.23%
5) HPQ $19.37 Dividend Yield 3.63%
6) ABBV $87.70 Dividend Yield 5.4%
All of these dividends seem pretty safe to be and the valuations of the stocks are quite compelling as well. This week, earnings start, including those of the big banks. I expect the quarter to be pretty good overall. It is disappointing that Congress has yet to finalize a stimulus deal, especially as it seems like they are pretty close on money. We will see what happens in the next few weeks, but regardless, stimulus is coming, which will be good and is frankly needed. We will see how things develop, but I think there is a lot of opportunity. 2 of the 6 stocks that offer these great dividends have the potential to double over the next 2-3 years, while I think all of them have between 30-50% potential upside to go with the yields. Volatility is still quite high, but we should really benefit from our sold options as they expire in late January as well. I’d also note that value stocks have a history of doing well after Presidential elections, so with the spread between value and growth wider than it has ever been, this could be another nice tailwind.