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A Wal-Mart supercentre (Rick Wilking/Reuters)
A Wal-Mart supercentre (Rick Wilking/Reuters)

Bond yields should make dividends shine Add to ...

Brett Arends at the Wall Street Journal has taken an interesting look at one of the more puzzling developments in the stock market these days: Investors are willing to snap up corporate bonds that have absurdly low coupons, while virtually ignoring the heftier dividend yields that the stocks offer (another shout-out to Abornormal Returns).

Mr. Arends focuses on the case of Wal-Mart Stores Inc. , but could have easily looked at other blue-chip companies that have recently issued ultra-low-yielding bonds, including Microsoft Corp. , International Business Machines Corp. , DuPont and Johnson & Johnson .

In the case of the Wal-Mart offering, the three-year bonds pay out a mere 0.75 per cent a year, the five-year bonds pay out 1.5 per cent, the 10-year bonds pay out 3.25 per cent and the 30-year bonds pay out 5 per cent.

Investors are grabbing these low-yielding bonds, but should they? Mr. Arends compared the returns to what you can get from dividends on the common shares, which currently yield 2.2 per cent. Unlike bond payouts, which are fixed, dividends tend to rise steadily. As he noted:

"Wal-Mart has raised dividends by an average of 16 per cent a year over the past decade. If it merely raises them by 10 per cent a year in the future, the yield on the stock will surpass that on the 10-year bonds within about five years. It will surpass that on the 30-year bonds within 10 years."

Clearly, bond-buying investors are looking for safety here. But it is a puzzling move: If inflation rises even a little, those miniscule bond yields will fall below zero in real terms.

Follow on Twitter: @dberman_ROB

 

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