Are Dividend Stocks Safer Than Bonds?

Marc Faber, writer of the Gloom, Boom & Doom Report, recently challenged the traditional notion that government bonds are safer than stocks in an interview on Bloomberg TV:

The [Swiss] 10-year government bond yield is 0.7% and you can buy quality companies and they have a dividend yield of maybe 3%. Relative to government bonds, equities are attractive. If you really think it through and you are bearish as I am and you think the whole financial system will one day collapse, maybe three years or five years or 10 years, one day there'll be a reset and everything will be essentially started anew. Then you are better off in equities than in government bonds because a lot of government bonds will either default or they will have to print so much money that the purchasing power of money will depreciate very rapidly.

And while U.S. 10-year Treasury bonds yield roughly 2%, investors can still find plenty of stocks yielding higher dividends right up to (and through) any apocalypse. Should you trust Faber? Should you trust governments? Should you trust dividends?

Faber's wagers
In late 2000 when oil hovered around $30 per barrel, Faber wrote how the price of oil could reach $100 per barrel. Oil spiked to over $140 per barrel in 2008, and now hovers around $100 per barrel. In early 2001, Faber recommended gold and gold miners when the price of gold hovered around $260 per ounce. Gold spiked to over $1,800 per ounce last year, and now hovers around $1,650 per ounce.

This is just a sampling of his correct calls, but like any expert, he can't actually predict the future. For example, just last year he made a bet that the U.S. 10-year Treasury bond yield wouldn't fall below 2.08%. In October, the yield hit a low of 1.8%.

Government's gambles
For the first time in history, Standard & Poor's downgraded the United States' credit rating last August from a supreme AAA to a little-less-than-sparkling AA+. Rating agencies also took an axe to European credit ratings earlier this month. Do these ratings matter?

Many say no. Since the American downgrade, stocks sure haven't taken a beating; the Dow Jones (INDEX: ^DJI  ) is up over 11%. Also, if the ratings meant anything, U.S. Treasury bonds should have been seen as more risky, and investors should have demanded a higher return. Instead, 10-year U.S. bond yields dropped from 2.58% on the day of the downgrade to the current 2.05%.

But certain countries are riskier than others. Of course, Greece constantly knocks on default's door, and private bondholders will most likely lose no matter how "default" is spelled in Greek. Italy's prospects look better, but the IMF forecasts its GDP to shrink over 2% in 2012, which will further strain government budgets.

The ultimate question is whether or not you believe more in a Berkshire than Brussels or the Beltway.

Dreamy dividends
Running a screener for large-cap stocks with a five-star CAPS rating and a dividend yield greater than 2% turned up plenty of results. I also looked for a safe payout ratio to ensure the company -- unlike some governments -- can afford to keep operating. Here are some picks:

Company

Dividend Yield

Payout Ratio

Johnson & Johnson (NYSE: JNJ  ) 3.5% 54%
Coca-Cola 2.7% 34%
Intel (Nasdaq: INTC  ) 3.1% 33%
3M (NYSE: MMM  ) 2.6% 37%
Sysco (NYSE: SYY  ) 3.6% 40%

 Source: Motley Fool CAPS.

All these companies dominate their industries and reward shareholders with a healthy dividend higher than the current U.S. 10-year Treasury yield. If you, after some contemplation, find the future significantly gloomy enough, these stocks could weather through government defaults, a cataclysmic asteroid, or a new Mayan calendar. Personally, I think Faber is a little early on calling doomsday, and believe better gains can be had outside of these market heavyweights.

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Fool contributor Dan Newman sleeps with gold ingots under his mattress, just in case. He holds no shares of the companies mentioned above. Follow him @TMFHelloNewman. The Motley Fool owns shares of Johnson & Johnson and Intel. Motley Fool newsletter services have recommended buying shares of Sysco, Johnson & Johnson, Intel, and 3M. Motley Fool newsletter services have also recommended creating diagonal call positions in 3M and Johnson & Johnson. 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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