By JACK HOUGH
Investors who buy Procter & Gamble (PG)
That's not how stocks and bonds are supposed to work.
Since 1962, top-quality bonds in the U.S. have carried an average yield of 8%, while stocks have yielded an average of 3%, according to data from the Federal Reserve and Yale economist Robert Shiller.
Historically, higher yields for bonds versus stocks have helped make up for the fact that dividends for healthy companies tend to grow over time, while bond coupons are fixed. P&G raised its dividend payment by 7% in April, marking 56 straight years of increases.
If a company increases its dividend by 7% a year, payments to its shareholders will more than double by year 12, while those to its bondholders will be unchanged.
Of course, bondholders can take comfort in knowing they will get their principal back at maturity, so long as the issuer can be counted on to pay (and P&G is considered highly reliable). Stockholders are subject to the uncertainty of future share price changes.
But over a long enough time period, dependable dividends can offset much of that uncertainty. If P&G can grow its dividend payments by just 5% a year, then after 13 years, stockholders will have collected more than $66 in dividends for each $61 share they bought today.
The relationship between stock and bond yields has been turned upside down by three factors. First, the Federal Reserve has kept its core "Fed funds" rate near zero since December 2008, and has at times bought bonds aggressively to push yields down. Both measures are designed to spur economic growth, but they have also left bond investors facing meager yields.
Second, government debt levels are high in the U.S., Japan and Europe, while many global companies are stuffed with cash, borrowing only opportunistically. That has made corporate bonds attractive to safety-minded investors, who have pushed prices higher and yields lower. "In some ways top-rated corporate bonds are the new sovereign bonds," says Dan Heckman, senior fixed income strategist for U.S. Bank Wealth Management.
Third, while investors in their hunt for safe yield have driven bond prices to record highs, they haven't done so with stocks. The Standard & Poor's 500-stock index trades at 13.9 times trailing earnings, a slight discount to its historic average. P&G shares have tumbled of late on news the company will undo some of its price increases to protect market share -- a common setback in the household products business, but one that stock investors are showing little patience for.
Of course, P&G's bond yields are also so low because of its privileged position as a borrower. It's one of only 14 large American companies whose unsecured bonds are rated Aa ("very low credit risk") or Aaa ("minimal credit risk") by Moody's.
Now seems a good time for bond investors to consider adding more shares for income. Investors have just come through "the decade of the bondholder," during which bond prices have soared on falling interest rates and companies strengthening their balance sheets, says Katherine Nixon, chief investment officer at Northern Trust, a Chicago investment firm managing $700 billion. Now they're likely entering the decade of the shareholder, when companies will be pressured to turn their cash hoards into dividends and stock repurchases, she says.
Below are listed P&G and four other companies with unsecured bonds rated Aa or better by Moody's, whose dividend yields are larger than the yields on their intermediate-term bonds.
|Company (Ticker)||Bond Yield||Bond Maturity||Dividend Yield|
|Chevron (CVX)||1.9%||Mar. 2019||3.4%|
|Coca-Cola (KO)||2.3%||Sep. 2021||2.6%|
|Johnson & Johnson (JNJ)||2.8%||Nov. 2024||3.6%|
|Procter & Gamble (PG)||3.0%||May 2027||3.7%|
|United Parcel Service (UPS)||2.1%||Jan. 2021||2.9%|