Buy "Dividend Aristrocrat" Stocks as Federal Reserve Reports Muni Bond Defaults much Higher than Expected
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investing is an endeavor in trade-offs.
The less risk involved, the lower the rewards. Municipal bonds, those issued by cities, have always paid lower yields due to the perception of reduced risks in the securities. Turns out that is not true, however. According to a recent Federal Reserve report, there were 2,521 defaults from 1970 to 2011.
Over that same period, Moody's Investment Service reported only 71.
This certainly runs contrary to what Bill Gross, "The Bond King," just wrote in "Cult Figures" in which he proclaimed that, "Long-term historical returns for Treasury bill and government/corporate bondholders validate that logic, and it seems sensible to assume that same relationship for the next 100 years."
That is certainly true when the default rate is understated by more than 95%. It is much less inviolate now that the Moody's data for bonds has come into question.
While it will only get worse for those holding municipal bonds due to economic growth falling and unemployment rising for the United States in the future, the same period will reward those owning shares of "Dividend Aristocrats." These companies constitute the "...S&P 500® Dividend Aristocrats index measures the performance of large cap, blue chip companies within the S&P 500 that have followed a policy of increasing dividends every year for at least 25 consecutive years."
No way to understate defaults in that group as the dividend income is either raised annually for at last 25 consecutive years, or it has not. Since 1989, the Dividend Aristocrats have return 12.05% annually against an S&P 500 return of 9.82%. In addition to the higher gains, there have been less variable returns with a 15.11% standard deviation posted against the annual returns of 18.67%.
Dividend Aristocrat members in the consumer staples section are the most attractive for long term growth trends around the world. For the same reason that municipal bonds will suffer, falling economic growth and rising unemployment, many stocks will fall, too. Those such as Wal-Mart (NYSE: WMT), McDonald's (NYSE: MCD), Coca-Cola (NYSE: KO), Johnson & Johnson (NYSE: JNJ), and Archer-Daniels (NYSE: ADM) should still perform well. The dividend component of each will buttress the total return.
Historically, according to investing legend Jack Bogle in his book, Enough, dividend income has provided more than 40% of the total return of an equity. In addition, the predictability of this dividend income and growth is highly prized by Warren Buffett, another investing legend. It is not a coincidence that Warren Buffett is heavily invested in Wal-Mart and Coca-Cola.
This is due to the dividend framework of a representing a commitment of the company management to its shareholders, particularly individuals. A healthy dividend with a robust framework evinces not only sound management, but also a willingness to reward those owning the stock. Companies that can not only pay a dividend regularly, but increase it annually for 25 years manifests a corporate culture that not only provides shareholders with rising income, but replenishes the management ranks very well so that the business can afford it into perpetuity from the earnings flow.
Johnson & Johnson, Coca-Cola, Wal-Mart, Archer-Daniels and McDonald's have not only demonstrated that, but are all positioned to perform well with a stagnant economy in the United States along with the growth in emerging market nations around the planets. In a recent report, "Winning the $30 Trillion Decathlon" by McKinsey & Co., the global consulting firm, it is predicted that by 2025 the emerging market consumer spending will account for $30 trillion in spending, about half the total for the world.
As consumers grow more affluent, more is spent on health care, particularly pharmaceutical products. From this Johnson & Johnson, the drug giant, with a dividend yield of 3.58% and profit margin of 13.47%, will benefit. The diets will also grower richer, increasing business for farming equipment company Archer Daniels Midland Company, presently offering a dividend income of 2.58%.
McDonald's, Wal-Mart and Coca-Cola will continue to deliver for the shareholders, as has been done for decades. For McDonald's, the profit margin is 20.03% and the dividend paid is 3.20%. Coca-Cola has a profit margin of 18.49% and pays a dividend of 1.89%. The dividend yield for Wal-Mart is 2.20% and the profit margin is 3.68%.
That companies are more secure investments over time than governmental entities is not just limited to American firms. Samsung, the South Korean high tech giant, issued bonds earlier this year that paid a lower interest rate than those from the government. Dividend Aristorcrats have aleady proven to perform better than the overall members of the S&P 500. As the avearge dividend for companies on the S&P 500 is around 2%, the performance here is far superior. This advantage is multiplied over time due to the rising dividends.
A Dividend Aristocrat is an investment the long term. The increasing dividend raises this income feature through compounding. According to Albert Einstein, "Compound interest is the eighth wonder of the world. he who understands it, earns it...he who doesn't...pays it." That is the exact same principle for the allure of dividend growth.
Buying Dividend Aristocrats is for those who understand the power of time in investing. The best investors are always those who buy for the long term. Those that understand this and practice it, prosper from the rising dividend incomes. As Louis Armstrong, the great blues musician, once stated, "Them's that don't know, never well.'
"Them's that don't know", buy municipal bonds; unknowing about the higher default rates until recently. "Them's that do know", acquire Dividend Aristrocrats and profit from a very healthy total return augmented by rising dividend payments over the long term. Those gains will continue from those consumer companies situated to gain from long term global growth terms.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Archer Daniels Midland Company, Johnson & Johnson, The Coca-Cola Company, and McDonald's. Motley Fool newsletter services recommend Johnson & Johnson, McDonald's, and The Coca-Cola Company. 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.