Tags: Smith | dividend | bond | blue chip

Haverford CIO Smith: Blue-Chip Dividend Stocks Are the Buy of a Lifetime

By    |   Friday, 07 February 2014 08:32 AM

Investors have a once-in-a-lifetime opportunity to buy blue-chip stocks with dividends that are higher than that of the companies' corporate bonds, according to Hank Smith, chief investment officer at Haverford.

The rare phenomenon means blue-chip stockowners can get capital appreciation if the share price rises in addition to the dividend advantage — a double-barreled advantage, Smith tells Yahoo.

"This does not happen very often," he notes. "I would even call it a once-in-a-generation opportunity. You'd have to go back to the mid-1950s; that was the last time you saw equity dividend yields higher than bond yields."

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As an example, Smith asserts McDonald's is one of many blue-chip stocks that has a higher dividend yield on its common stock than on its eight-year corporate bond. In return for the higher dividend, Smith acknowledges investors have to be willing to accept volatility in the stock price, but he suggested the risk-reward was worth it.

At current stock market valuations, Smith argues every S&P 500 sector, from industrials to healthcare, offers blue-chip stocks with dividends yields that are higher than that of the same companies' corporate bonds.

"You don't have to go to the traditional dividend-rich sectors of utility and telecommunications stocks anymore," he states.

But according to U.S. News & World Report, dividend-paying stocks may actually be overrated.

In the throes of the recession in 2009, about 57 percent of dividend-paying companies either reduced their dividends or eliminated them altogether.

It's also debatable whether dividend stocks outperform the broad market, and whether they are a reliable source of future income, since tax laws can change at any time, U.S. News reports.

"Some investors believe they can improve their yields, without taking additional risk, by dumping bonds from their portfolio and substituting higher dividend-paying stocks. This analysis is incorrect on several levels," according to US News.

But Dividend Growth Investor maintains dividend stocks can help investors prepare for retirement if some basic guidelines are followed, including contributing regularly to dividend portfolios, focusing on dividend growth stocks and diversifying among stock sectors.

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Investors have a once-in-a-lifetime opportunity to buy blue-chip stocks with dividends that are higher than that of the companies' corporate bonds, according to Hank Smith, chief investment officer at Haverford.
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2014-32-07
Friday, 07 February 2014 08:32 AM
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