Week 326 - Investing for Income

Situation: Bonds or stocks? Which will give you a larger monthly check without disrupting your sleep? For stocks, the standard would be SPDR Dow Jones Industrial Average ETF (DIA), yielding 2.2%. For bonds, the standard would be iShares 20+ Year Treasury Bond ETF (TLT), yielding 2.5%. So far, so good. But what if you want more income than those “plain vanilla” options provide? For example, a bond index fund that wouldn’t be hit for a big loss if inflation were to spike upward? Then you would want to be an investment-grade intermediate-term index fund like the Vanguard Interm-Term Bond Fund (BIV). If you’re a stock-picker and want more yield, you’ll need to start with a close look at the 400+ stocks in the Russell 1000 Index that yield more than a market average 2%. There’s an exchange-traded index fund (ETF) that holds positions in all such stocks: The Vanguard High Dividend Yield ETF (VYM). Our Table for this week pulls out 8 Dividend Achievers that we think do the job. But remember, you’d have to hold positions in all 8 to minimize selection bias. Then, you’d have an investment that yields ~2.7% and is likely to grow those dividends ~9%/yr.

Mission: Find A-rated Dividend Achievers with a higher yield than DIA, a clean Balance Sheet, and less volatility over the past 20 years than the S&P 500 Index. 

Execution: We find 8 companies in the Russell 1000 Index that meet those criteria, except for minor Balance Sheet issues (see Table).

Bottom Line: Low-risk investments that yield more than 3% have almost disappeared. We find only two: WEC Energy Group (WEC) and Procter & Gamble (PG). Of course, there are some companies and government agencies that issue bonds paying a higher interest rate, but you’d have to invest $25,000 in each to avoid paying high up-front transaction costs. And, you’d need to have positions in several such bonds to minimize selection bias.  

Risk Rating: 3 (where 10-Yr US Treasury Note = 1, S&P 500 Index = 5, gold = 10)

Full Disclosure: For equities, I dollar-average into NEE, PG and JNJ, and also own shares of TRV, WMT and MMM. For bonds, I own shares of BIV.

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