Your Bonds Have Abandoned You. Now What?

At the end of the 30-year bull market in bonds, it's no secret that 2013 has been a miserable year for Treasury holders. Even the most optimistic among fixed-income investors must admit that returns look minimal at best -- and negative at worst. For persons with significant allocations in longer-term Treasuries (e.g., 10 to 30 years), inflation promises to wreak havoc on your portfolios. Now is the time to think hard about alternatives for your steady, substantial, and, most importantly, safe income needs.

Cash-rich dividend-raisers
Former and current bondholders know they can count on steady interest payments, usually paid twice a year, for the life of the entities they hold. While this is comforting, a legitimate shortcoming is inflation and its irritating ability to erode your purchasing power.

For example, a $10,000 investment in a 10-year Treasury yielding 3% today will pay you $300 annually. However, after adjusting for 2% inflation (the approximate 10-year average), your $300 payment after year one year will be worth only $294 in today's dollars. After five years, it is worth $272. And at the end of the tenth year, it will bring you a mere $246.

What if you could find an investment that had a substantial yield that could not only keep up withinflation, but crush it?

There are companies today with balance sheets that would make our federal government blush. Far from needing to print money to keep themselves out of trouble, these companies mint money the old-fashioned capitalistic way: by profitably providing their customers with products that they need and want.

Companies that will crush your 10-year Treasury returns
Regardless of your political stripes, war is a modern-day fact of life. Many companies supply our government with their "necessary" weapons, but none is more intimately involved with Uncle Sam than Lockheed Martin . At the start of Barack Obama's eight-year tenure, there were many predictions about the demise (or, at least, poor performance) of defense companies secondary to the anti-war beliefs of a Nobel Peace Prize-winning president. However, we continue to be in conflict with organizations and countries from around the world.

Lockheed has not only survived this administration; it has thrived. With an operating cash flow of nearly $3 billion and shareholder-friendly policies, its dividend continues to crush inflation. Most recently, LMT raised its quarterly dividend 16% from $1.15 to $1.33 for a current yield of 4.3%.


Everybody knows, and loves to hate, former dot-com-era darling Microsoft . But as a shareholder, you will learn to love owning a company with a better rating ("AAA") than the venerable U.S. government ("AA+"). Happily, Microsoft increasingly rewards its shareholders with boulder-like chunks of the cash it collects from its customers.

Far from dying, Microsoft boasts $77 billion cash in the bank, more than $77 billion in annual sales, and a whopping trailing-12-month return on equity of 30%. What's more, since 2008, Microsoft has raised its dividend nearly 16% on average, and it just recently hiked it 22% from $0.23 to $0.28 a quarter -- good for a 3.3% annual yield.


The third "bond alternative" that you should consider is the notorious BP . Perhaps the least loved of the three companies because of its 2010 Gulf of Mexico explosion and oil-spill fiasco, BP is looking to become a favorite long-term retirement holding. Astute investors would do well to dig deeper.

From its transparent handling of massive litigation to its large and growing dividend, BP has worked hard to regain the respect of affected Americans and the confidence of its previously traumatized investors. Reinitiating its quarterly dividend in 2011 at $0.42 a share after a brief hiatus, BP has steadily increased the payout to the current rate of $0.54 for a whopping yield of 5.1% -- the highest yield BP has paid since 1992! What's more, BP trades at just five times earnings and is due for another dividend raise in the near future. So buy it at its current depressed share price and plan on decades of large, safe, and growing dividends.


With investors flustered at the end of a 30-year-plus bull market in bonds, alternative income investments are needed to confront and crush inflation. Shareholder-friendly companies with a commitment to relentlessly raising dividends are, in my opinion, your most lucrative and safest bet. Socially or politically undesirable companies often become the darlings of your long-term portfolio as they reward you with steady dividends and inflation-beating raises year after year.

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Jeff Ross is long Lockheed Martin, Microsoft, and BP. The Motley Fool owns shares of Lockheed Martin and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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