5 Companies with Stocks that Pay More than Their Bonds

published 23 September 2011

For investors, 2008 was notable for many reasons, not least of which was the catastrophic decline in the prices of stocks and almost every other asset class that didn't have the word Treasury in its name. But the year also proved to be a watershed in market history, marking the first time since 1958 that dividend yields on U.S. stocks exceeded the interest rate on ten-year Treasury bonds. Before 1958, stocks had out-yielded Treasuries for as far back as records existed -- a period of at least 75 years.

It may be a while before the trend reverses. As stocks continue to sink and Treasury bonds continue to stage a remarkable rally, the yield disparity widens (as share prices fall, stock yields rise, assuming dividend rates remain constant; fixed-income yields, meanwhile, move in the opposite direction of bond prices). As of September 22, Standard & Poor’s 500-stock index yielded 2.38 %, and the ten-year Treasury yielded 1.72%, for a spread of 0.66 percentage point.

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All of the companies have staying power. But not only do we expect them to survive hard times, we think they’ll be able to maintain and increase their dividend payments. That makes holding their stock a big advantage over holding their bonds, which pay a fixed rate of interest. The stocks should also hold up better than the overall market during the current downturn and participate fully once the market emerges from its current funk. All share prices and related numbers are as of September 22. The stocks are listed in alphabetical order.

For juicy yields, it’s hard to top the payments from AT&T and its archrival, Verizon Communications (see below). Both companies continue to lose landline customers as people hang up on traditional phones and go exclusively wireless. But both have strong wireless businesses, which in AT&T’s case accounts for half of revenues, and they generate tremendous amounts of free cash flow (the cash profit left after the capital outlays needed to maintain the business) that serves as the basis for steady dividend payouts.

The company aims to return 60% of its annual earnings to shareholders. It has boosted its dividend by nearly 80% since 2004, and it has paid out more than $3.5 billion to shareholders during that period. And its stock, at 15 times estimated earnings of $3.33 per share for the year that ends next April 30, looks cheap compared with the rest of the food sector, which on average trades at about 15 times forecasted earnings.

Investing in this well-diversified giant is almost like buying a health care mutual fund. J&J boasts a diversified revenue stream across drugs, medical devices and consumer products. Its pharmaceutical segment in particular is poised to profit from new products, such as treatments for hepatitis C, prostate cancer and HIV. In addition, the company recently acquired orthopedic medical-device company Synthes for $21.3 billion, a deal that will help J&J solidify its leading position in a fast-growing segment of the health care market.

Pepsi is benefiting from growing sales overseas -- especially in emerging markets, where it is expanding. Last February, for example, Pepsi acquired a majority interest in Wimm-Bill-Dann Foods, a Russian dairy company. The owner of such brands as Pepsi-Cola, Frito-Lay and Quaker Oats is also revamping its global beverage unit to boost profitability. Last year, the company bought its two largest North American bottlers, which should help it reduce costs and respond more nimbly to changing consumer tastes.

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