Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Bond Bubble Brewing

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

McDonald's (NYSE: MCD  ) definitely didn't price last week's bond issue off the Dollar Menu. The company issued new 10-year bonds with only a 3.5% coupon, and The Wall Street Journal reported the issue had the lowest interest rate for a 10-year U.S. corporate issue in at least 15 years.

The bond pricing is interesting since McDonald's stock yields more than 3%, and if it continues its trend of annual increases, the payout will be super-sized again this fall. Odds of those bonds having a yield premium over the stock at today's price by the end of 2011 are about the same as taking a long road trip and not seeing a Golden Arches somewhere near a highway exit. In short, the bonds look expensive, at least relative to the stock.

Since single data points don't tell a full story, I looked for other high-quality dividend growers with bonds that appear overvalued relative to the stock. The table below shows examples with each stock's dividend yield, an assumed dividend growth rate, bond maturity date and yield, and how many annual dividend hikes before the stock yield passes the bond yield. To be conservative, the assumed dividend growth rate is the smaller of the three-year dividend growth rate, the five-year dividend growth rate, or 10%.


Dividend Yield

Assumed dividend growth rate

Bond Maturity

Bond Yield

Hikes Needed to Top Bond Yield







Procter & Gamble (NYSE: PG  )












Kraft (NYSE: KFT  )






Heinz (NYSE: HNZ  )






Chevron (NYSE: CVX  )






ExxonMobil (NYSE: XOM  )






Sources: The Motley Fool,, and author's calculations.

In all these cases, the bonds don't offer much income advantage over the stock, the spread evaporates pretty quickly, and with record low yields, the bondholders aren't getting much protection against inflation risk.

For companies with debt coming due and good credit ratings, these rates are a gift. Rolling debt over at today's rates lowers interest expense -- freeing up cash flow for capital expenditures, acquisitions, or returning cash to shareholders.

Evidence of a bond bubble? Maybe, maybe not. Even if bonds are bubbling, that bubble may keep inflating for quite some time. Are bonds expensive? I think so. Bubble in with a comment to share your opinion.

Related Foolishness:

Fool contributor Russ Krull owns shares of McDonald's and Chevron, but no other companies mentioned. The Fool has a disclosure policy that has never been in a bubble.

Read/Post Comments (2) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 03, 2010, at 8:43 PM, dth20k wrote:

    Stocks offered a higher yield than bonds from the Great Depression through about 1958. This was considered normal, given the extra volatility associated with equities, the ease with which dividends on common stock could be cut, and common stocks low position in the capital structure in case of liquidation. I agree that bonds seem pricey now, but then again, the most hawkish members of the Fed are now raising the specter of QE2 (quantitative easing, part two). If the Feds buy trillions in long term treasuries, lowering the yield below 2%, well....

  • Report this Comment On August 03, 2010, at 11:41 PM, rd80 wrote:

    @dth20k - Thanks for the comment and additional points. One of the characteristics I looked for was stocks with little credit risk and long-run, stable businesses to take as much default or dividend cut risk off the table as possible.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1257362, ~/Articles/ArticleHandler.aspx, 10/22/2016 10:06:04 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:00 PM
CVX $101.30 Down -0.57 -0.56%
Chevron CAPS Rating: ****
HNZ.DL $72.49 Down +0.00 +0.00%
H.J. Heinz Company CAPS Rating: ****
IBM $149.63 Down -1.89 -1.25%
IBM CAPS Rating: ****
KRFT.DL $0.00 Down +0.00 +0.00%
Kraft Foods CAPS Rating: *****
MCD $113.93 Up +3.36 +3.04%
McDonald's CAPS Rating: ***
PG $84.33 Down -0.60 -0.71%
Procter and Gamble CAPS Rating: ****
XOM $86.62 Down -0.59 -0.68%
ExxonMobil CAPS Rating: ****