The Place For Yield

150 150 Northstar Financial Planners

Among the many common investing maxims is this one: “Buy bonds for income.” It seems like common sense. Stocks may or may not pay dividends. The company issuing the stock can raise or lower the dividend. But a standard bond comes with a promise to make regular interest payments in a fixed amount. No wonder we refer to the entire asset class of bonds as “fixed income.”

But while it is true bonds provide the bondholder with regular, predictable income, it is not a foregone conclusion that they offer the best source of income. Viewed in aggregate, corporate dividends look pretty attractive.

Case in point: What was the return of the S&P 500 Index over the last 20 years (1995 – 2014)? This is easily calculated. Ending price on 12/31/2014 compared to beginning price on 1/1/1995. Up 348%. Simple math. Also wrong.  Why is it wrong? Because if you held that index, or all 500 stocks in the index, you would have received dividends. Not from all of the companies but from many of them.  If you add in dividends received over the last 20 years, your total return goes up to 555%.

Last year, the S&P Index was up 11.39%. Not a bad year. But in addition to the stock price increases, the companies represented in the index paid a total of $39.44 in dividends.  That represented a 12.72% increase over 2013. Yes, dividends increased more rapidly than stock prices, which means the dividend yield increased. Rapid dividend growth in equities has been the story for several years now, since stocks reached their recession bottom in 2009. At the same time, bond yields have continued to reach new lows.  In fact, as of mid-February, the S&P is yielding 1.98% while the 10-year treasury is at 1.80%.

So is this a new normal? At Northstar we don’t believe in new normal. Old normal sometimes take a holiday but it always returns, and rewards us for our patience and diligence. But it is an interesting perspective. Even if this oddly inverted yield curve is only a temporary phenomenon, the robustness of equity yields and dividend growth is worth considering when we ponder the question of investment income sources.

Unlike bonds, a reliable income stream would be difficult to create by buying just a few company stocks, but there is no reason to think that an asset class like large U.S. stocks would not continue to provide attractive dividends going forward.

That’s enough to re-examine the conventional view on bond income. We find that common wisdom may indeed be common, but not necessarily wise.



Northstar Financial Planners

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