10-Year Treasury Yield Rises – Ouch to Bond Holders: Some Div Stocks Instead?
It’s been a rough month for the flight-to-quality trade. Between some semi-encouraging (as in not totally discouraging) U.S. economic data and the proclamation of ECB chief Mario Draghi in late July that the EU would do whatever it takes to keep a united currency, the 10-Year Treasury yield rose as the global appetite for a safe-haven dissipated.
And as bond yields rise, prices fall. For example, the iShares Barclays 7-10 Year Treasury ETF (IEF) has a 12-month yield of 2%. Over the past month the hit to the ETF’s price more than wiped out that payout.
Now that said, the total return for Treasuries are still in positive territory when you pull back the lens and look at the past year; but it sure has been quite the rocky ride given the schizophrenic nature of the economic outlook here and abroad.
If you’re in the market for income, the current 1.8% yield on a 10-year Treasury that will generate price losses if the yield continues to rise doesn’t seem all that risk-free. Sure, yields could in fact slump again; it’s not like the case for economic growth in the U.S. or a successful resolution of the Euro mess are assured. But look at the chart above for a reminder of the topsy-turvy ride of late.
There’s no question that stocks are always packing more volatility than bonds, but a quick screen of the YCharts database pulls up some compelling blue-chip stocks with dividend yields that are at least double the 1.8% Treasury yield, that are rated attractive.
The energy sector has been a laggard all year given slowing economic growth around the globe. That’s definitely a short-term concern, but unless you think the long-term picture is for a severe pullback in global energy demand, the underperformance makes for some intriguing opportunities to buy at cheaper valuations. Consider Total (TOT). There’s a dividend yield north of 4% for a stock that is anything but pricey, based in Total's PE ratio.
In today’s low-rate world, a high current yield from an attractively valued company that has a commitment to raising its payout qualifies as mouthwatering.
Filed under: Investing Ideas