When the stock market is turbulent, there's nothing more comforting than getting income from your investments. Share prices can rise and fall, and paper gains give way to losses and back again, but getting a check in hand is the real deal -- and is more valuable than ever.
If you like drawing some income from your portfolio, you've had to deal with an all-out attack on fixed-income yields from the Federal Reserve and safety-crazed financial institutions. But fortunately, you have alternatives. They may not be perfect, but they're a lot more rewarding -- and they have the potential for even greater gains going forward.
A historic crossover
Traditionally, if you wanted a solid income investment with no risk of losing your principal, you'd go to the Treasury market. Specifically, long-term Treasuries offered reasonable income yields that often greatly exceeded what you could get from riskier investments such as stocks. The trade-off was that you'd give up any chance of seeing your investment grow, as with a bond, what you invest upfront is what you get back when the bond matures.
But as you well know, August has brought a torrent of unusual news and huge volatility to the financial markets. Among the other landmark events you've seen, including the near-default resulting from the debt ceiling debate and the first-ever downgrade of Treasury debt, add this one to the list: This week, for the first time in 50 years, the yield on the benchmark 10-year Treasury bond fell below the dividend yield of the S&P 500.
Where the income is
Now bear in mind, that crossover didn't last long: After Thursday's big rebound in stocks and drop in Treasuries, Treasury yields were back above the S&P dividend yield. But the fact that those yields are anywhere close to each other shows just how risk-averse investors are.
Think about it: If you buy a Treasury bond rather than a dividend-paying stock with the same yield, you're essentially saying that the stock has no expected growth whatsoever. Conversely, if you choose the stock, you know that the dividend alone should compensate you for your invested money; any capital gain above that is icing on the cake.
But if you're not satisfied with the 2% to 2.5% that the S&P 500 and 10-year Treasuries pay in yield right now, I have more good news: You don't have to settle for less. In fact, it's easy to find plenty of relatively safe large-cap stocks that double the income you'd get from a 10-year Treasury. Moreover, you can get them from a wide cross-section of the stock market. Here are some examples:
- If you think that so-called "sin stocks" are the path to prosperity, you don't have to go far down the alphabet to find cigarette maker Altria
and beer distributor AmBev (NYSE: MO) . They both have in-demand products with loyal customers, and with Altria paying more than 6% and AmBev more than 5% in yield, you'll get some regular income to go with your growth prospects. (NYSE: ABV)
- Banks in the U.S. largely went the way of the dividend dodo during the financial crisis, but in the Great White North, Canadian financial institutions still stand tall. Bank of Montreal
and Canadian Imperial Bank of Commerce (NYSE: BMO) both weigh in with solid 5% yields, while insurer Sun Life Financial (NYSE: CM) comes in just shy of the 6% mark. (NYSE: SLF)
- Energy stocks have gotten thrown to the floor as bears weigh a potential double-dip recession. That's pushed yields on master limited partnerships Kinder Morgan Energy Partners
and Enterprise Products Partners (NYSE: KMP) into roughly the 6% range. (NYSE: EPD)
In fact, when I did my search, I found 60 stocks from sectors ranging from pharmaceuticals to mining, telecom to utilities, and many more. So depending on which industry is your favorite, you can pick and choose from among all these high-yielding stocks. And if you buy them, you can win in two ways: the regular cash from their dividend, as well as possible gains when stocks rebound from their recent swoon.
Better than a sure thing
It's a certainty that when it comes to getting back your principal, dividend stocks are riskier than Treasuries. But with all the other uncertainties out there -- inflation, currency devaluation, and sovereign debt, just to name a few -- dividend stocks might actually do a better job of fighting all the risks you face than Treasuries do.
If you want even more great dividend-stock ideas, check out this free special report from the Motley Fool. Inside, you'll find 13 names, along with analysis to tell you why we think they might fit well in your portfolio.
Fool contributor Dan Caplinger always likes it when stocks show him the money. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Altria Group. Motley Fool newsletter services have recommended buying shares of Enterprise Products Partners. 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 Fool's disclosure policy gives you double the pleasure and double the fun.