Sell Bonds
In the last two posts we looked at “Selling Bonds & Avoiding a Bond Market Bubble” and “Interest Rate Risk, Not Credit Risk, is Why You Should Sell Bonds”. These posts examine the high risk and low potential rewards of bonds because of a 30 year bull market that has produced record low bond yields and record high bond prices.
Moving From Overvalued Assets to Undervalued Assets
If an investor chooses not to own bonds, what is the best asset allocation strategy? Having the flexibility to move from overvalued assets to undervalued assets is the biggest benefit of a tactical asset allocation strategy. Investors can take a sensible risk by selling an overvalued asset and buying the undervalued asset.
Buy Best Dividend Paying Stocks
The best asset allocation strategy might be to sell bonds and buy the best dividend paying stocks. The best dividend paying stocks would be companies with solid balance sheets, growing cash flow, and attractive valuations. Many of these companies are offering yields in excess of treasury yields and also offer the potential for growth in both dividends and share price. In addition, dividend income is currently taxed at lower rates than interest income.
Example Dividend Growth Portfolio
I have put together an example of a mini portfolio of 6 dividend paying stocks. For diversification these stocks represent 6 different industries: communications, utility, technology, pharmaceutical, energy, and defense & aerospace.
Price on Dividend
8/08/20 Yield
Verizon (VZ) $33.12 5.9%
Exelon (EXC) $39.94 5.3%
Intel (INTC) $20.11 4.2%
Eli Lilly (LLY) $34.80 5.6%
Chevron (CVX) $90.25 3.5%
Lockheed Martin (LMT) $68.90 4.4%
Average Yield on Mini-Portfolio 4.8%
10 Year Treasury Yield 2.3%
Investors who are risk adverse can split their asset allocation between dividend paying stocks and a money market fund. For example, you may choose to put 50% of your previous bond allocation in stocks and 50% in a money market. This would lower the yield but reduce risk. The yield can still be higher than 10 year treasuries but carry much less interest rate risk and offer greater potential for growth.
Disclosures: The AAAMP is long VZ, INTC, CVX, and LMT. No positions in EXC and LLY.
Given the risk and low yield of bonds, do you think some combination of dividend growth stocks and cash make a good substitute?
| AAAMP Blog by Ken Faulkenberry | |
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Ken Faulkenberry earned an MBA from the University of Southern California (USC) Marshall School of Business with an emphasis in investments. Ken has 25 years of investment experience and is dedicated to helping people with self-directed investment management through the Arbor Investment Planner. His asset allocation strategies have an outstanding performance record. |
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Andrew – I totally agree that stocks such as Johnson & Johnson (JNJ), Procter & Gamble (PG) ,and many dividend aristocrats are over hyped and not good values. At the same time I believe there are underappreciated dividend stocks such as Lockheed (LMT), Intel (INTC), or Verizon that offer income opportunities that far surpass the risk/reward offered by Bonds.
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