Advocating for Steady Growth and High Dividend Investments:
- The navy blue line below shows the yield on investment-grade bonds with ~5 year average maturities
- The light blue line shows the yield of the KCR Top 10 ranked staples stocks
- With both groups yielding ~8% at the peak of the dot.com mania, both staples and these intermediate investment-grade bonds rose 25%, while the equity index fell 40%
- We would note our top 10 ranked staples stocks rose 57% during this same time period
- Today, these safe harbor bonds yield a paltry 1.3%, while our top ranked staples yield 4.5%
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We believe that owning some of the most durable and economically resilient firms that are growing (unlike a bond) may be a welcome and relatively safe place to pick up healthy income and total returns for long-term investors. This strikes us as particularly true in light of how expensive markets are as we documented here.
The chart below shows the yield of our top 10 ranked staples stocks (KCR Top 10 Staples) minus the yield of the intermediate-term investment-grade bond index. This is the light blue line from the chart above minus the dark blue line from the chart above. This represents the dividend yield of our favorite staples less the yield of intermediate investment-grade bonds.
When the line in the chart below is in negative territory, it means you could buy very high-quality investment-grade bonds with short maturities that had higher yields than our top-ranked staples. When the line is in positive territory, like it is today, it means the dividend payments from our top-ranked staples were higher than the dividend payouts from intermediate investment-grade bonds.
We think it noteworthy that there is virtually no income to be had from these bonds today. Conversely, our staples stocks offer both higher total yields and a historical tendency to actually grow. Personally, we prefer the durable and high-income growth of our staples picks to the paltry yields on offer from investment-grade bonds.
As we explained in our Quick Take on Wednesday, our top 10 ranked staples are cheaper than 83% of all the stocks in our Large Cap universe. Our ranking methodologies score companies for balance sheet quality, earnings quality, managerial integrity, and valuation. Only at the peak of the dot.com bubble have such durable stocks with healthy yields been this cheap.
Below we show you our top 10 ranked Staples in 2000 and today vs. the Intermediate Bond Yield and S&P 500.
We believe the picks and data below are a powerful endorsement for investing in some of the most proven companies that make the basics you need. This is a theme we have discussed at length in our research here and here.
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July 13, 2021 |
| Authors: Matthew Malgari, Nathan Przybylo, Dr. Sanjeev Bhojraj and John Durkin
July 13, 2021
Authors: Matthew Malgari, Nathan Przybylo, Dr. Sanjeev Bhojraj and John Durkin