Editor's Note: A previous version of this article included an incorrect dividend yield for Carnival. This has been rectified; the Fool regrets the error.
Investors typically want two things from their portfolios: healthy current income and the potential for future growth. Right now, both of those factors are pulling investors back into the stock market like a rip current during a hurricane -- and you can expect the market's advance to continue as long as those conditions exist.
Treasuries? Why bother?
After last year's panic and the big drops that the stock market suffered, everyone wanted to stay in cash. As a result of all the demand for ultra-safe investments like Treasury securities, investors were willing to accept dismal returns just to have a secure place to park their money.
The problem, though, is that those no-risk investments have seen their returns plummet over the past two years. Three-month Treasury bills pay interest at a whopping 0.16% annual rate. Put another way, the Treasury will be happy to pay you $1,000 come November -- as long as you're willing to put up $999.59 today. That's right: $0.41 of interest to give up your money for three months.
Moreover, Treasury rates don't get a whole lot better unless you're willing to lock up your money for a really long time. A two-year note gets you just more than 1%. A five-year clocks in at 2.5%. Even assuming a fairly low 3% inflation rate, you're talking about accepting a negative real return just for security and peace of mind.
Alternatives are gone
Unfortunately, things are tough all over for fixed-income investors. The top bank savings accounts pay close to 2%, while bigger banks such as HSBC (NYSE:HBC) and Discover Financial's (NYSE:DFS) Discover Bank pay less than 1.5%. The days of getting 5% on your money are over, at least for the foreseeable future.
Even if you're willing to lock up your money for a while, you're not seeing the same return you used to be able to get. Historically, individual investors have sometimes been able to get better rates on bank CDs. Indeed, short-term rates on CDs are better than similar Treasuries -- the average one-year CD pays about 1.75%, while the average for five-year CDs is 2.87%, according to Bankrate.
There's nothing left but stocks
Bear in mind, too, that none of the investments discussed above give you any potential for growth. The interest rate is all you get -- so buying a Treasury or a bank CD right now is basically a bet that treading water is the best you can do with your money.
In contrast, even after the big rally, there are still many stocks that pay dividends at higher rates than all but the longest-term Treasury bonds or bank CDs right now. Just take a quick look at what the stock market offers these days:
|
Stock |
Current Dividend Yield |
20-Year Average Annual Return |
|---|---|---|
|
Hershey (NYSE: HSY) |
3% |
10.5% |
|
Home Depot (NYSE:HD) |
3.3% |
15.9% |
|
Boeing (NYSE:BA) |
3.7% |
6.8% |
|
Mattel (NYSE:MAT) |
4.1% |
9.1% |
|
Limited Brands (NYSE:LTD) |
3.9% |
6.8% |
|
NICOR |
4.9% |
11.4% |
Source: Yahoo! Finance.
Moreover, as you can see, dividends aren't all you get with those stocks. Over the long run, they've also given shareholders a considerable amount of additional price appreciation on top of their dividend payments.
Worth the risk?
Of course, the obvious downside to taking all your money out of cash and bonds to put into stocks is that your stocks can lose value if the rally ends. But as long as interest rates stay low, investors have a huge incentive to put money to work in the stock market. That incentive, combined with the enormous amounts of cash that investors still have on the sidelines, will create big demand for shares -- which in turn will support stock prices, as the rally feeds on itself.
At some point in the future, interest rates will rise again, and investments like bonds and bank CDs will become competitive again. As for now though, they only seem suitable for people who can't afford to take any risk with their money -- and can accept getting just about no interest in the bargain. The rest of us are likely to keep buying stocks, pushing prices ever higher until fixed income rates start to jump.
