Dividends vs. Coupons in the DJIA
This weekend's MarketWatch included "How to win the quest for yield with stocks," an article covering the quest for yield. This statement in the article got my attention: "Many companies are now paying dividends well in excess of their own bond yields."
Stocks versus bonds for income is a topic near and dear to me, so I decided to pull the thread and see how many of the 30 companies in the Dow Jones Industrial Average (INDEX: ^DJI) have dividend yields that top their bond yields. For each of the 30 stocks, I found bond issues with about 10 years to maturity, and compared the bond yield to the dividend yield. Fourteen of the 30 have a dividend yield that tops the yield on their bonds based on recent prices.
Company | Dividend Yield | Bond Yield | Bond Matures |
|---|---|---|---|
DuPont | 3.15% | 2.64% | April 1, 2021 |
Intel | 2.99% | 2.80% | Oct. 1, 2021 |
Johnson & Johnson | 3.59% | 2.21% | May 15, 2021 |
Kraft Foods | 3.11% | 2.93% | Feb. 10, 2020 |
Coca-Cola | 2.84% | 2.61% | Sept. 1, 2021 |
McDonald's | 2.89% | 2.55% | Jan. 15, 2022 |
Merck | 4.45% | 2.43% | Jan. 15, 2021 |
Microsoft | 2.60% | 2.26% | Feb. 8, 2021 |
Pfizer | 4.03% | 3.30% | March 1, 2023 |
Procter & Gamble | 3.19% | 2.25% | Feb. 6, 2022 |
AT&T | 5.76% | 3.04% | Feb. 15, 2022 |
Travelers | 2.82% | 2.74% | Nov. 1, 2020 |
Verizon | 5.37% | 3.02% | Nov. 1, 2021 |
Wal-Mart | 2.66% | 2.52% | April 15, 2021 |
Source: Yahoo! Finance and FINRA.org.
This yield inversion means these companies could issue debt to finance a share buyback and improve cash flow. That doesn't mean they should, just that they could. More importantly, investors looking to the bonds of these companies for income should be taking a hard look at the stock instead. If selling bonds to buy stock would help a company's cash flow, it's reasonable to expect an investor's cash flow could also improve by choosing stock over a company's bonds in some cases.
Of course, dividend yield alone isn't enough reason to make an investment. But this is fertile ground for further research. I have outperform CAPScalls on Intel (NAS: INTC) , Johnson & Johnson, McDonald's (NYS: MCD) , and AT&T on my scorecard; they're all up compared to their start prices, and three of the four are ahead of CAPS' benchmark.
At the time thisarticle was published Fool contributor Russ Krull owns shares of Intel, McDonald's, and AT&T, but none of the other companies mentioned.The Motley Fool owns shares of Wal-Mart Stores, Intel, Johnson & Johnson, Coca-Cola, and Microsoft. Motley Fool newsletter services have recommended buying shares of Coca-Cola, Intel, Johnson & Johnson, Microsoft, McDonald's, Procter & Gamble, Pfizer, and Wal-Mart Stores. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores, a bull call spread position in Microsoft, and a diagonal call position in Johnson & Johnson. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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