If you are a bond investor looking for current income, you have to be feeling a little down these days. With the 10-year Treasury barely yielding 2%, the only way to get a decent return is by dipping into more exotic territory like high-yield junk bonds or emerging market bonds. In most bond offerings, you’re looking at a stream of income that is too low to meet current needs yet promises to actually get worse with the passing of time. This isn’t investing; it’s slow-motion lifestyle suicide.
For a stream of income that is both tolerably high today and likely to keep up with inflation tomorrow, you need to invest in dividend-paying stocks. The yields on the stocks of many world-class, blue chip companies are higher than what you can get in the bond market, and unlike bonds—whose coupon payments are fixed—healthy companies can and do raise their dividends with time.
So, in the spirit of bluesman John Lee Hooker—and his classic One Bourbon, One Scotch, One Beer—I’d like to offer one dividend stock, one dividend ETF, and one dividend mutual fund.
We’ll start with the stock. I can think of nothing to cure the low-yield blues than a fat 9% dividend, and that is exactly what Spanish telecom giant Telefónica (NYSE: $TEF) is offering at current prices.
Telefónica has taken a beating in recent years due primarily to weakness in the Spanish fixed-line market. Yet Telefónica’s promising Latin American markets—which make up nearly half of revenues—continue to grow. While mobile phones are already ubiquitous in Latin America, many consumers still use simple prepaid plans or share a single phone with multiple family members. The upgrade cycle to smart phones with expensive data plans is just beginning, and Telefónica is in excellent position to capture this trend.
Telefónica cut its dividend last year to conserve cash during the Eurozone debt crisis; yet even after the cut, the yield stands at 9%, and I believe that the payout is likely to significantly rise again within a year. Telefónica is a stock that you can plan to hold for years, milking the dividend all the way.
Moving on, with the market looking at risk of a short-term correction, having some part of your portfolio allocated to more defensive sectors would seem prudent. And the iShares Dow Jones Select Dividend ETF (NYSE: $DVY) fits the bill quite nicely. Nearly half of the ETF is invested in utilities and consumer staples, and all of the companies included have a long history of consistent dividend payouts. This was the first ETF formed with a specific dividend-focused mandate, and it remains one of the best.
At current prices, DVY yields 3.33%, which is considerably more than what you will find in the bond market. This ETF is a fine investment option for yield-hungry investors irrespective of what happens in the broader market.
Finally, for the mutual fund, I’m going to go a slightly different direction. Rather than focus on high yield today, I recommend that investors buy shares of the Vanguard Dividend Appreciation Fund (VDAIX) with a mind towards tomorrow. The Vanguard fund follows the investment methodology of the Dividend Achievers Index, meaning that it only buys shares of companies that have raised their dividends for a minimum of ten consecutive years.
We’ve had a pretty rough go of it over the past ten years, and particularly the last five. If a company was able to raise its dividend through something like the 2008 meltdown, you know that it has the ability to survive Armageddon. And VDAIX is loaded full of companies that meet that description.
Currently, the fund yields just shy of 2%, within basis points of the 10-year Treasury. But unlike that Treasury note, the Vanguard fund will almost certainly pay you a larger check next year and every year after that. In addition to being a reliable source of income, this is a fund that you can make the core of your growth portfolio.
So, dear reader, don’t despair. There are income options out there besides traditional bonds. And if these three don’t lift your spirits, perhaps putting on an old John Lee Hooker record will help.