When people talk about bonds today, more often than not the conversation will get into dividend paying stocks. This reflects the favorable comparison for dividend-paying stocks relative to bonds. For example, Johnson & Johnson (TKR = JNJ) has a dividend yield of 3.60% (go to Yahoo! Finance and put in the ticker symbol to find the yield) compared to the yield on the 10-year U.S. Treasury note of 1.98%.
How to find 10-year Treasury yield:
- click "Markets"
- find "Government Bonds" in drop-down list
- find yield indicated in the graphic
To see the difference, note that, if we invest $5,000 in the Treasury, we will get $100 in interest/year (5000*.02). On the other hand, if we buy $5,000 of JNJ, we will get $180/year (5000 * .036) based on the current yield.
Even the well-diversified iShares Dow Jones Select Dividend Index (ticker symbol DVY) yields considerably higher at 3.37% compared to the sub 2% yield on the 10-year Treasury.
Looking at the numbers,it is easy to see the compelling case for dividend-paying stocks. It is easy to understand why people argue that the low interest rate policy of the Federal Reserve is pushing investors, especially those who need high income, into riskier assets. In this regard, it is useful to reflect on the essential difference between bonds and stocks. Very simply, we know the price of the bond at a future date. For example, the 10-year Treasury note will have a price of $100 on 2/15/2022 - its maturity date. In contrast, the price of JNJ, or DVY for that matter, is unknown going forward.
Which do you prefer - the 10-year Treasury, JNJ, or DVY?
Disclosure: My clients and I own some of the securities mentioned in this post. It is intended solely for educational purposes. Individuals should do their own research and/or consult a professional advisor before making investment decisions.