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%[1]
  • 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%

 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.

Yields on our Top Ranked Staples Intermediate Investment Grade Bonds over Time Copy

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.

The Total Yield Spread Between our Top Ranked Staples and Intermediate Grade Bonds Copy

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.

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.

The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

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