In addition to spinning on taxes, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) CEO Warren Buffett said this week that investors that are buying bonds at current yields are "making a mistake," offering the following advice on asset allocation:
"It's quite clear that stocks are cheaper than bonds," Buffett said. "I can't imagine anyone having bonds in their portfolio when they can own equities, a diversified group of equities."
Although I disagree with the idea of comparing stock and bond valuations, I do agree with Buffett that government bonds are unattractive. At a yield of 2.39% for the 10-year Treasury, the best outcome is that you will earn a 2.39% annual return on your investment. That is stating the obvious, but to paraphrase George Orwell, yield-starved investors have sunk to such depths that restatement of the obvious is the first duty of the intelligent analyst.
Would you accept a half a percent in return?
To get an idea of your expected annual return on an inflation-adjusted basis, just take a glance at the real yield on the same maturity TIPS (Treasury inflation-protected securities), which is now less than half a percent. Faced with that prospect, I'd prefer to keep my money in cash and wait for better opportunities.
High-quality dividend payers are attractive
As for the second half of Buffett's recommendation ("when they can own a diversified group of equities"), I disagree if he is referring to owning the S&P 500 index, but I'm on board if he means high-quality dividend stocks -- one of the most attractive segments in this market. If you are looking for specific names, you need look no further than Berkshire's own portfolio, which contains just such stocks, including:
|
|
Dividend Yield |
Long-Term EPS Growth |
P/E Multiple* |
|---|---|---|---|
| Republic Services (NYSE: RSG) |
2.65% |
12.5% |
18.1 |
| ExxonMobil (NYSE: XOM) |
2.83% |
12.1% |
11.1 |
| General Electric (NYSE: GE) |
2.98% |
10.9% |
14.9 |
| Berkshire Hathaway Stock Portfolio |
2.24% |
8.6% |
13.4 |
| Benchmark: SPDR S&P 500 ETF (NYSE: SPY) |
1.90% |
10.7% |
13.8 |
Source: Capital IQ, a division of Standard & Poor's, and AlphaClone. Market data as of June 5.
Stocks for the long run
I'll end by stating another home truth: If you're going to put your money into stocks, you must adopt a long time horizon -- as Gluskin Sheff economist David Rosenberg noted this week, "a stock by definition has an infinite duration." Investors who are prepared to do this should find that a well-chosen group of high-quality names should provide a very acceptable return.
At a five-year time horizon, dividend yield and dividend growth account for nearly 80% of stocks' total return. Over the next five years, it could well be higher than that. The Motley Fool's top analysts have identified 13 high-yielding stocks to buy today.
