This weekend's MarketWatch included "How to win the quest for yield with stocks," an article covering the quest for yield. This statement in the article got my attention: "Many companies are now paying dividends well in excess of their own bond yields."
Stocks versus bonds for income is a topic near and dear to me, so I decided to pull the thread and see how many of the 30 companies in the Dow Jones Industrial Average (INDEX: ^DJI) have dividend yields that top their bond yields. For each of the 30 stocks, I found bond issues with about 10 years to maturity, and compared the bond yield to the dividend yield. Fourteen of the 30 have a dividend yield that tops the yield on their bonds based on recent prices.
|
Company |
Dividend Yield |
Bond Yield |
Bond Matures |
|---|---|---|---|
| DuPont |
3.15% |
2.64% |
April 1, 2021 |
| Intel |
2.99% |
2.80% |
Oct. 1, 2021 |
| Johnson & Johnson |
3.59% |
2.21% |
May 15, 2021 |
| Kraft Foods |
3.11% |
2.93% |
Feb. 10, 2020 |
| Coca-Cola |
2.84% |
2.61% |
Sept. 1, 2021 |
| McDonald's |
2.89% |
2.55% |
Jan. 15, 2022 |
| Merck |
4.45% |
2.43% |
Jan. 15, 2021 |
| Microsoft |
2.60% |
2.26% |
Feb. 8, 2021 |
| Pfizer |
4.03% |
3.30% |
March 1, 2023 |
| Procter & Gamble |
3.19% |
2.25% |
Feb. 6, 2022 |
| AT&T |
5.76% |
3.04% |
Feb. 15, 2022 |
| Travelers |
2.82% |
2.74% |
Nov. 1, 2020 |
| Verizon |
5.37% |
3.02% |
Nov. 1, 2021 |
| Wal-Mart |
2.66% |
2.52% |
April 15, 2021 |
Source: Yahoo! Finance and FINRA.org.
This yield inversion means these companies could issue debt to finance a share buyback and improve cash flow. That doesn't mean they should, just that they could. More importantly, investors looking to the bonds of these companies for income should be taking a hard look at the stock instead. If selling bonds to buy stock would help a company's cash flow, it's reasonable to expect an investor's cash flow could also improve by choosing stock over a company's bonds in some cases.
Of course, dividend yield alone isn't enough reason to make an investment. But this is fertile ground for further research. I have outperform CAPScalls on Intel (Nasdaq: INTC), Johnson & Johnson, McDonald's (NYSE: MCD), and AT&T on my scorecard; they're all up compared to their start prices, and three of the four are ahead of CAPS' benchmark.
