The Price Of Safety ? ~ MAKE MONEY BLOG$

9/3/11

The Price Of Safety ?

10:39 PM

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That may be hard to fathom given the stock market’s summer swings of 1% to 4% a day. Meanwhile economists slashed growth forecasts for most rich economies and many put the chances of renewed U.S. recession at about even.

Yet, stocks are likely a safer bet than bonds right now. First, they’re paying more. The S&P 500 now yields 2.3%, while the 10-year Treasury’s yield at 2.1% is near historic lows. After 10 years, Treasury investors, assuming they can reinvest their coupon payments at 2.1%, will end up with about $23 in return for each $100 invested. Even assuming stock prices go nowhere, stock investors who reinvest their dividend payments are still ahead. If we consider that dividends increase by an average of 5% a year–as they have for the past half century–stock investors will earn $35 per $100 invested, even in a flat market.

but that was the first time since 1958. Remember that bond yields are usually higher because stock dividends tend to grow over time and bond coupons don’t.

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During the 2008 financial crisis, weak companies, including most banks, reduced or stopped dividend payments, purging the market of its least-dependable payers. But today’s stock dividends appear relatively safe. Companies that are doing well now have hunkered down and adapted to a slow growth environment. Many have strong balance sheets and large cash reserves.

According to research by Bank of America Merrill Lynch, dividend payments are now just 29% of S&P 500 profits. That’s the lowest level since 1900, and perhaps in history, according to the study. So even if profits stall or dip, companies–and their investors–seem to have a cushion.

We added high dividend paying funds to NoLoad Fund*X’s existing growth fund holdings this month. Some of the dividend-focused funds currently leading in NoLoad Fund*X include: