Lock in Gains, Not Losses
Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Don’t buy losses, buy gains
Here is an example: You are walking down the street one day and a man walks up to you. He says he needs money for all sorts of things, and that if you help him out you wouldn’t be disappointed. He says he has a triple A credit rating and will pay you 0.71% a year in interest over five years, on top of the principle. Now here you have a choice, do you want to lock in your money for 10 years and make 0.71% a year?
If you answered yes
If you answered yes then slap yourself in the face a couple of times to wake yourself up. If that doesn’t work get some coffee, that should do the trick.
If you answered correctly (which is no)
Congratulations! You are a rational investor and don’t think that the world is going to implode in on itself. You are someone who sees a terrible deal and just walks away from it. The terrible deal in this instance is US Treasury Bonds.
Why is it a terrible deal?
At 0.71%, you are paying for the right to lend money to the US government. Yeah, that doesn’t sound that appealing (to be fair, if you are buying T-Bills or ETF’s invested in T-Bill’s and are planning on selling them the same day for a tiny gain, then this doesn’t really apply to you). With the CPI index coming in at 1.7% and the core CPI at 1.9%, the 0.71% you are making on your T-Bill isn’t even going to cover the rate of inflation. Over the course of five years you are continuously going to lose money. One thing you have to keep in mind is that inflation usually isn't under 2%, from 2003 to 2008, inflation averaged 3%. Even a 10 year T-Bill would put you in the red in 10 years. Yay? No.
Does this slide look appealing to you?
A Much Better Idea
If you are looking for income but don’t have much of a stomach for risk, look for the dividend dynamos with high yields. The average dividend yield in the Dow Jones Industrial Average (DJI) is 2.89%, which is significantly higher than the 2, 5, or 10 year T-Bill yield. Take a company like Merck & Co Inc (NYSE: MRK), which is currently yielding 3.85%. Merck is one of the largest drug companies in the world, and for the foreseeable future mankind will still need pills and vaccines to survive. Not bad, especially combined with the fact that this company is expected to grow its EPS by 5% over the next couple of years, even with the "patent cliff" looming ahead. But maybe you want something without any sort of risk that still is a high yielder.
The Safe Bet
Possibly the safest company to invest in is Exxon Mobile Corp (NYSE: XOM), which has been around for over 100 years (think Standard Oil back in the day). Yields 2.47%, trades at a PE of 9.7, and sells something that everyone needs, energy! Without petroleum, the world grinds to a stop, just as we saw in 1973, 1974, or 1979. Plus, since 1978 this stock is up over 3,100%. Exxon can provide stable income, as its payout ratio is 21%, less than half the industry average. Exxon continuously raises its dividend every year, and with a payout ratio that is that low, there is no way Exxon will miss a payment. Also, Exxon is projected to grow its EPS by 8.2% over the next several years, and with China's demand for oil up 100% since 2001 (BP 2012 Energy Review), that seems reasonable.
More I Say!
Maybe 2.47% isn't enough, maybe you're hungry for more yield. Well guess what, AT&T Inc (NYSE: T) has got you! Coming in at 4.72%, this stock will yield 665% more than a 5 year T-Bill and 252% more than a 10 year T-Bill. That sounds like a much better deal than losing money each year. AT&T is projected to grow its EPS by 9.2% over the next several years and is a huge beneficiary of the smartphone revolution, as smartphone owners give AT&T 90% more revenue. Verizon Communications Inc (NYSE: VZ) is another way to get in on these high yielding telecommunication stocks. It is expected to grow its EPS by 10.75% over the next few years, yields 4.62%, and is also a beneficiary of the smartphone revolution.
Final Thoughts
There are many, many high yielders out there, and just because there is a "fiscal cliff" coming up, Europe is full of problems, and there is a slowdown in China, doesn't mean you should set your money on fire by crawling into a government shell. You can still rest easy at night with these high yielding Dow Jones stocks and beat inflation. These are companies that aren't going away anytime soon, and you can receive both income payments and capital appreciation. The world is a scary place right now, but don't get duped into buying a "safe-haven" when companies like Exxon Mobile have survived tons of recessions, including the Great Depression, the Great Recession, and the Savings and Loan Crisis in the late 1970's. Buy Gains, Not Losses!
callumturcan has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
