MARKETWATCH VIEW: Move Over, Uncle Sam--Top Dividends Beat Bonds

Date : 06/13/2011 @ 12:46PM
Source : Dow Jones News
Stock : Raytheon Company (RTN)
Quote : 155.21  -1.05 (-0.67%) @ 3:59PM

MARKETWATCH VIEW: Move Over, Uncle Sam--Top Dividends Beat Bonds

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   By Brett Arends 
   A DOW JONES COLUMN 
 

Gulp! Nervous times again. Suddenly everyone is afraid of a double dip. The Dow Jones Industrial Average is down six weeks in a row, tumbling below 12000 for the first time since the Japanese panic in March.

Nervous investors are stampeding into the "safety" of Treasury bonds instead, driving up prices across the board.

Should you follow suit?

Hmmm. Here's a slightly contrarian point of view.

The rush into Treasurys has driven the yield on 10-year bonds tumbling, below 3%. Meanwhile, the selloff on Wall Street has driven stock yields in the opposite direction.

You can now find top quality blue-chip stocks that offer dividend yields better than 3%.

No, they're not perfectly comparable. Stock dividends, unlike Treasury coupons, aren't guaranteed. But neither are they capped: Over time, companies increase their dividends. Regular Treasury bonds don't hike their coupons after a good year.

Furthermore, bond coupons are taxed as ordinary income. Stock dividends are taxed more lightly.

Using FactSet, I ran a screen of large-cap stocks, valued at more than $10 billion, where the dividend yield exceeds 3%. To cut down on the risks, I also weeded out stocks that were trading at more than 16 times forecast earnings, and where interest cover is less than two times.

Abut 50 stocks passed the test. A decent number.

They range from telecom providers like AT&T (T) to consumer staples like Campbell's Soup (CPB), Kimberly-Clark (KMB), H.J. Heinz (HNZ) and Kellogg (K). They include a lot of big drug companies, such as Abbott Labs (ABT) and Eli Lilly (LLY) defense contractors like Raytheon (RTN); some industrials, tobacco companies, and plenty of those old dividend standbys, utilities, like Consolidated Edison (ED). Even Limited Brands (LTD), parent of Victoria's Secret, makes the cut.

At a time when investors and savers are desperate for income, some of these are worth a serious look.

Several of the names are investments held by Warren Buffett's Berkshire Hathaway (BRKA, BKRB), which may reassure anyone feeling nervous about jumping in here. They are Kraft (KFT), Procter & Gamble (PG), Johnson & Johnson (JNJ), and Swiss drug company Sanofi-Aventis (SNY). (A few other Buffett holdings just miss the cut. Coca-Cola (KO) now yields 2.7%, and Wal-Mart (WMT) 2.5%.)

 
   10 stocks that beat Treasurys 
 

If you're looking to jump in, the easiest move--and maybe the smartest one--is to buy a low-cost "large-cap value" fund that invests in blue chips with good yields.

 
Name                                  Industry  Dividend Yield 
Altria Group Inc. (MO)                Tobacco   5.8% 
Verizon Inc. (VZ)                     Telecom   5.6% 
American Electric Power Co. (AEP)     Power     4.9% 
Merck & Co. (MRK)                     Drugs     4.4% 
Lockheed Martin Corp. (LMT)           Defense   3.9% 
Johnson & Johnson                     Consumer  3.4% 
DuPont Co. (DD)                       Chemicals 3.3% 
M&T Bank Corp. (MTB)                  Finance   3.3% 
McDonald's Corp. (MCD)                Fast Food 3.1% 
Chevron Corp. (CVX)                   Oil       3% 
 

(Brett Arends is a writer for MarketWatch. He can be reached at 415-439-6400 or via email at AskNewswires@dowjones.com.)




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