False Choice: Yield vs. Safety

by Addison Wiggin

  • Why ordinarily sane investors ditch a 3.7% yield for one of less than 3%… and a much better solution

  • Bailing out Goldman, Citi, etc., now exceeds the cost of defeating Hitler, Tojo, etc.

  • Squeezing the taxpayer twice: The ugly truth about Washington’s latest “infrastructure” spending plan

  • The business that’s recession proof (if highly cyclical)

  • Readers ponder Form 1099 horror… and suggest guerrilla tactics to fight it

Question: Given a choice, which would you rather buy?

A. A blue-chip company’s 10-year corporate debt yielding 2.95%

B. The same company’s stock, with a dividend yield of 3.68%

If you answered “A,” then you must have a really bad feeling about where the stock market’s going.

But such is life in late 2010. S&P 500 dividend yields are beating corporate bond yields by the most in at least 15 years, says new research from Bloomberg. Sixty-eight stocks in the S&P 500 pay a dividend over 3.8% — which is the average yield of S&P bonds. This is the highest number of bond-beating dividends since Bloomberg started keeping track in 1995.

For some perspective, since 1995, the average corporate bond yield in the S&P 500 is 6.2%. The average dividend is 1.8%.

Two forces are at work here…

  • Federal Reserve easy money and the “flight to safety” trade are pushing bond yields down

  • At the same time, record profits and aggressive cost cutting in the private sector are restoring many dividend payments to pre-crisis highs.

Thing is, if it’s safety you’re after, you don’t have to settle for a lower yield.

“When it comes to stocks, finding safe opportunities these days is nearly impossible,” explains our income analyst Jim Nelson. “But dividend payers offer the closest thing to security. And industry-safe blue chips give you an even larger cushion in case of a collapse.

“More importantly, if you have an investment strategy to get into a position at the best possible price, you are ahead of the game. As we’ve noted time and again, there’s no better entry-cost averaging than dividend reinvestment plans, or DRIPs.

“A dividend reinvestment program is simply a way for you to build a larger position in a company without wasting your money on a broker’s commission fees. In the United States, 913 publicly traded companies allow you to purchase shares directly from the company. Once you’ve signed up, each time the company issues a dividend, it will automatically deposit the corresponding shares into your account. Sometimes, the company will even give you a discount to the market price.

“After a few quarters, you should actually see this making a difference in your account. And heck, given enough time, you should see those reinvestments double or even triple your initial stake.”

This is why DRIPs are a core component of Jim’s Lifetime Income Report portfolio. He spells it out this morning in his new issue titled, “Seven Market Moves to Grow Your Income Even if the Market Collapses This Fall.” One of them offers DRIP investors a 5% discount on every share purchase.

You can learn all about them — plus Jim’s favorite new dividend player — by clicking here.

Sign of the Times, Part 1: Federal bailout spending now exceeds the inflation-adjusted cost of World War II, according to our friends at the Independent Institute.

Senior Fellow William Shugart says World War II cost $3.6 trillion, but the bailouts now top $4 trillion. That’s actual money out of the taxpayer’s pocket, as opposed to the $12.8 trillion “lent, spent or guaranteed” figure you run across from time to time, a chunk of which might eventually be repaid.

And that’s just the direct cost. “As a result of keeping zombie businesses alive,” Shugart writes, “bailouts misallocate scarce productive resources away from more economically efficient (and profitable) uses elsewhere in the economy, alternatives that actually would promote growth and reduce unemployment.”

Can’t have that now, can we?

Stocks are recovering a good chunk of yesterday’s losses. After a half-hour of trading, the S&P is back within spitting distance of 1100.

We’re noticing quite the inverse correlation lately between U.S. stocks and the dollar. Thus, the dollar index has fallen half a percent today to 82.5. Doesn’t bode well if the only reason stocks are rising is that the currency they’re valued in is falling.

So is it any surprise gold is approaching record territory again? As of this writing, it trades at $1,257 an ounce.

Sign of the Times, Part 2: Paulson & Co.’s Recovery Fund lost 9.1% in August. Its Gold Fund gained 9%.

It looks as if the White House has hit on one way to pay for its proposed $50 billion of new infrastructure spending: Strip the oil and gas industry of tax incentives totaling $36 billion.

The idea “may have a tough time finding support in the few weeks Congress has left to consider it,” according to the trade publication Platts, “but the administration could sway votes if it tailors its efforts to proposals that target the biggest oil companies.”

“Here's the thing about ‘infrastructure’ stimulus,” says Byron King. “We're already paying for it.

“Whenever you buy gas or tires, or whenever a truck hauls freight, buys diesel or tires, or whenever you buy an airline ticket… you are paying tax to the national infrastructure bank. It's just that Congress doesn't spend that money on infrastructure. Congress spends it on other boondoggles.”

“So when Obama says we need to tax somebody else — oil companies — to ‘pay’ for infrastructure, we're buying the same horse twice.”

No wonder Byron’s gone in search of oil opportunities overseas. One that he’s uncovered has him especially excited, and not just because its acreage is located about as far from Washington, D.C., as you can get.

Based on data from an independent analysis, the company has 30 barrels of oil backing each share of stock — which at the moment can still be had for under $2.50. Byron shares the whole story with you here.

Sign of the Times, Part 3: We’ve just uncovered a line of business that appears to be recession proof — albeit highly cyclical.

U.S. House and Senate campaigns have raised $1.2 billion so far in this election cycle. According to the Associated Press, the number is on a pace to crush the figures set in 2008, 2006 and 2004. Ditto for the 37 governor races this year.

No surprise here… As long as the power of government keeps growing, so will the number of interest groups and their desire to game the system to their advantage.

Just wait till the K Street outfits start issuing IPOs…

“You only send a 1099 to a person,” writes a reader attempting to correct us. “You don't send a 1099 to a business (i.e., the truckers reporting fuel purchases). So the fear you are creating is very misleading. If you have independent contractors working for you, you must report their income; this is not an unnecessary burden of the Obama administration.

“I don't like Obama, but your article is not on point; it is like you are using fear to sell subscriptions.”

The 5: Don’t take our word for it. Here it is on the Dow Jones Newswires, July 30: “Under the health-care law, businesses beginning in 2012 will be required to file a form 1099 to the Internal Revenue Service for each supplier or service provider to which payments exceed $600 in a single year. They are already required by law to report payments to non-corporate service providers, but the health-care law broadened that to include corporate vendors and purchases of goods.”

“In 2009,” writes another reader, “we paid $626 to Georgia Power for electricity. Ours is a small two-room office, so most businesses in Georgia paid at least that much. What is it going to cost Georgia Power to process all the 1099s and what is the government going to do with the information?

”If this stupid rule goes into effect, I will close the business and go to work for the IRS, where at least I will get a paycheck every week.”

“I am mostly retired now but worked as an accountant for small business companies for a long time. One thing that your comments neglect on the time part is actually getting the Social Security numbers and EIN numbers for business entities. I know that often I spent a lot of time calling people at the end of the year and telling them we needed this number so we could complete the filing of 1099s. This, of course, took my time (or a secretary's time) plus the person we called had to take the time to call someone else, which these days means playing phone tag for days to actually get to talk to them.

“On a personal note, I do not want to give my Social Security number to anyone that I spend $600 with. It’s a sure route to having crooks sell items to people for $600-$700 and telling them they need the Social Security number to send the government a 1099 and then selling the number for thousands of dollars to an illegal. This is a huge nightmare and MUST be halted.”

“Here is an angle you probably didn't think of,” writes the owner of a campground in Florida. “For example, my activities director holds parties twice a month. Sometimes it's a pizza party, and we currently use three different locally owned pizza companies to spread the wealth around. Good public relations. After this rule, it will be much easier to use just one. Two get screwed, one benefits.

“Now let’s think that way for all the other companies we deal with — pick one and tell the rest sorry. Let’s carry that one step further. Hmmm, I can buy pizza at Wal-Mart, and beer, and chlorine for the pools, and lawnmowers, and paint, and just about everything else. I could cut out most of those 1099s by only going to one large has-it-all company.

“I think this will be the natural progression to the way people think. This will put even more pressure on the small businesses. Soon they will be dropping like flies. I think I'll go buy Wal-Mart stock.”

“What the hell is the matter with you people?” writes someone frustrated with his fellow readers. “Tell the government to stick it in their ear. If every small business refuses to send in those 1099s for the new $600 requirement, what do you think they are going to do? Jail you and not the other millions? The government is a criminal cabal, a gangster mob living off the backs of the producer class.”

“One way to deal with the 1099s,” writes a reader with a different monkey-wrench solution, “might be for everyone to start sending the forms in for EVERYTHING that they purchase, not just the over-$600 stuff. Force them to wade through tons of forms to find the ones that they really want. Totally overload the system with paper until the IRS starts crying uncle.”

The 5: Even if taxpayers don’t do that, there’s already hand wringing in Washington about whether the IRS can handle the workload. If repeal is on the horizon (and that’s a big if right now), it would likely come about not because Washington is concerned about the burden it would put on small business, but rather the burden it would put on Washington. Poor babies…

Regards,

Dave Gonigam

The 5 Min. Forecast

P.S.: As it happens, Addison is in Washington today shooting another installment of the documentary project. Among the people he’s talking with: Alvaro Vargas Llosa of the Independent Institute (and son of the Pervian novelist Mario Vargas Llosa)… and Carol Highsmith, a photographer who’s just donated her life’s work, photographing Americana, to the Library of Congress.

Just what these people have to do with deepwater archeology, Addison hasn't let on yet. (If you’re not familiar with that aspect of the documentary, we released a clip last week that you can check out here.)

rspertzel

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