By: Costas Bocelli — June 16, 2016
2 Strong Plays to Combat Negative Yields
Thinking about buying government bonds?
Well you'd better think twice, because more and more of it now comes with a negative yield.
In other words, governments now want you to lend them your hard earned money...
And expect you to pay them interest for the privilege!
That sounds completely ludicrous, but it's become a reality in many parts of the world.
According to Fitch, one of the big credit ratings agencies, the amount of global sovereign debt that carries a negative yield surpassed $10 trillion for the first time in May.
And if you think that's a staggering figure, brace yourself, because it's about to get a whole lot bigger.
You see, earlier this week, the yield on the 10-year German Bund dipped into negative territory for the first time ever. In all, nearly two-thirds of all German debt is trading with a negative yield.
Even worse, it's coming home to roost in the U.S. markets, and the prospects for investors searching for safe places to earn modest returns have greatly diminished.
But here's the good news...
As individual investors, we don't have to fall victim to zero or negative interest rate policy created by the world's central bankers.
Not at all...
We just have to identify the right kind of investments that will generate consistent and healthy rates of return.
I'm talking about dividend-producing stocks.
Stocks that can generate returns far greater than the paltry returns you could otherwise earn in money-markets, CD's or U.S. Treasuries.
And today, I've got two you should look at.
In fact, at current market prices, both of these stocks that I'm about to reveal generate yields that are more than double what you'd get by purchasing a 10-year U.S. Treasury bond.
Below is a chart on the 10-year U.S. Treasury yield.
Recently it dipped below 1.6%, and now stands less than 20 basis points from hitting the generational low achieved in the volatile summer of 2012.
10-Year U.S Treasury Yield: Next Stop, 2012's multi-decade low?
The Search for Yield
To be sure, piling into negative yielding European and Japanese sovereign debt doesn't seem like the most prudent investment one can make.
I mean, for every Dollar, Euro or Yen you're willing to invest, right off the bat you're accepting a haircut on the principal investment should you hold to maturity.
Of course, currency translations or short-term trading tactics could make it a profitable endeavor.
But for the average, self-directed individual investor — it's best to look elsewhere.
What about US Treasuries?
As compared to the negative yields in the other sovereign bond complexes, the returns on U.S. bonds seem relatively lush.
But what does "relative" really get you?
In other words, if you purchase a two-year Treasury note, you get a paltry yield of around 70 basis points.
And if you purchase a 10-year U.S. Treasury bond, you get an annualized return of around 1.60%, barely keeping up with inflation. Of course, if the long-dated yields continue to push lower, you could realize a bit more from the rising bond price.
But is there a better option?
We think so.
Because within the equity markets, there are stocks that currently offer superior yields, but with bond like qualities.
What I mean by this is companies that have a history of producing stable margins and delivering consistent and predictable earnings results.
Those are some of the qualities that lower the beta or the volatility risk exposure when holding the underlying asset.
So today, I'm going to share with you two stocks that distribute generous dividends and are currently demonstrating positive relative strength, both versus the market and compared to their respective sector peers.
They also tend to be defensive oriented investments, so if it turns out that Chris's technical analysis in True Market Insider earlier this week comes to fruition, then these two stocks could be a welcome addition to your portfolio.
The first stock to consider is Verizon Communications (Symbol: VZ), a large-cap communications company in the telecom sector.
I'll go ahead and say it: There's nothing fancy or exciting about this company.
It's a slow grower, as revenues and earnings are forecasted to increase by the low single-digits. But it's priced at just 14 times earnings, so it's relatively cheap, especially compared to the S&P 500.
But what makes Verizon such a compelling investment is that it's a cash machine and it pays out generously and reliably to its shareholders.
At its recent price, the stock pays a quarterly dividend of $0.565 per share, which equates to a 4.27% annual yield -- nearly 2.70% more than what you can earn holding a 10-year U.S. bond.
Can You Hear Me Now? Verizon distributes 4.27% dividend yield
The second stock to consider is Philip Morris International (Symbol: PM), a large-cap cigarette and tobacco manufacturer.
Technically, the stock has many positive attributes, including relative strength versus the market and compared to its peers in the household goods sector. The price chart also maintains a bullish trend.
Fundamentally, its growth outlook is much stronger than Verizon's, with revenues expected to grow by mid-single digits and earnings by high-single digits, so the stock commands a premium price-to-earnings multiple of around 22.
Like Verizon, Phillip Morris is another cash cow that generously returns back to its shareholders.
The company distributes a quarterly dividend of $1.02 per share, which equates to a 4.1% annualized yield when it recently traded around $99.50 per share -- again well in excess of what you can earn on a 10-year U.S. Treasury bond.
Phillip Morris: The Dividend Yield is Smokin' Hot
Until next week,