By JACK HOUGH
Investors already had two good reasons to lighten up on U.S. Treasury bonds. This week they got another.
The first reason is a puny payoff. The 10-year Treasury note recently yielded less than 2%, or less than one-third of what it has paid, on average, over the past half century.
The second is slipping quality. Standard & Poor's lowered its rating on the U.S. government to AA+ from AAA in August, around when Moody's confirmed its AAA rating but attached to it a "negative outlook".
This week, a congressional "super-committee," considered by many the best hope for a broad deficit-reduction deal, announced its efforts had come to nothing.
Financial markets responded in almost comical fashion: with a plunge in stock prices and a rush to U.S. Treasurys. Treasurys, after all, provide unmatched "liquidity" -- a nice way of saying that America's debt is larger than just about any other financial instrument investors can cram into.
Yield-hunters can do better. Safety seekers, too. Four American firms still have perfect credit ratings from both agencies: Microsoft (MSFT),
A comparison of Treasury bonds to dividend-paying stocks isn't an apples-to-apples one, of course. Credit ratings apply to bonds, which represent payment promises, not stocks, which represent shared participation in profits. In general, bond payments are safer than dividends, because the latter can be cut without triggering a default.
But three of the aforementioned companies are designated by Standard & Poor's as "Dividend Aristocrats", meaning they've increased their dividend payments for at least 25 consecutive years. The fourth, Microsoft, is a little young to be an Aristocrat, but it has steadily increased its dividend since it started making payments in 2003. In September, Microsoft's board of directors approved a 25% dividend hike.
On average, the four companies pay 38% of their profits out as dividends.
Yield isn't the only thing that goes into investor returns. Price changes matter too. And stocks are generally more volatile than bonds, as Monday's 2% drop in the U.S. market reminded. But shares of America's four AAA-rated companies have returned a cumulative 12%, on average, over the past five years, including dividends and gains. The S&P 500 index of large U.S. companies has lost just over 3%.
Among the most important determinants of tomorrow's price changes is today's valuation. Treasury yields are near record lows, which means prices are near record highs. Not so, the four stocks. They're mostly sitting at discounts.
The median S&P 500 company sells for 14 times projected profits. Microsoft and Exxon Mobil have price-to-earnings ratios in single digits. Johnson & Johnson is slightly less expensive than the broad market and ADP, a little more expensive. But on average, these four stocks cost 12 times earnings.
With alternatives like those, and few signs that U.S. creditworthiness is improving, it's time to swap some Treasury bonds for higher-quality assets.