If Bonds Suck, Where Does a Bond Guru Stash His Money?

Two of the most respected bond investors in the world are going out of their way to share their opinions on exactly how bad a value proposition bonds are these days with the long-Treasury yield doing a Bernanke-mandated limbo of epic depths.

30-Year Treasury Bond Yield Chart

30-Year Treasury Bond Yield data by YCharts

Lost amid Pimco bond chief Bill Gross’ August missive on the death of the cult of equities was the fact that he also pointed out (not for the first time) that bonds look especially treacherous going forward.

Then in mid-September, DoubleLine’s Jeff Gundlach took up the bond-bashing baton during a talk at a Bloomberg investor conference. The manager of the $31 billion DoubleLine Total Return fund noted that the 30 year Treasury currently offers “incredible downside” to the unwary. Gundlach points out that if the 30-Year T bond merely returns to its 2011 peak yield the capital loss would be 37%. That goes a long way to explaining why his fund’s current duration—interest rate sensitivity-is less than 2 years.

Now it’s unlikely any sane investor would have much-if anything-parked in 30-year Treasuries right about now, but just to be clear, that 37% price decline is not that much better than what happened to stocks during the depths of the 2008-2009 sell off, as seen in this stock chart.

^SPXTR Chart

^SPXTR data by YCharts

If you’re going to assume that sort of downside risk, you might as well take it over on the stock side of your portfolio, where dividend yields often best the long-Term Treasury, and it’s far easier to find a value proposition in stable established blue chips.

That also happens to be exactly where Gundlach steered his conversation, calling out Campbell Soup (CPB) as his idea of a better-than-a-bond investment.

Campbell Soup certainly has the more compelling dividend yield.

CPB Dividend Yield Chart

CPB Dividend Yield data by YCharts

Moreover, there’s been consistent dividend growth over the past 10 years. But Campbell’s revenue has lagged lately, and the company is the midst of a broad re-invention that will see the introduction of more than three dozen new products in its 2013 fiscal year.

A potentially better way to nab the Treasury-beating yield in the defensive packaged food industry is through General Mills (GIS), which has consistently maintained or increased its dividend for more than 100 years. Over just the past 10 years General Mills has been able to boost its dividend payout by more than 8% annualized, compared to just a 2.4% pace for Campbell Soup over that stretch.

Yes, General Mills is more expensive, based on PE ratio.

CPB PE Ratio Chart

CPB PE Ratio data by YCharts

But it’s not exactly in nose-bleed territory, and it certainly has the more impressive earnings story over the past decade.

CPB Earnings Per Share TTM Chart

CPB Earnings Per Share TTM data by YCharts

It also has plenty of room to keep up its century-long history of dividend increases.

GIS Payout Ratio TTM Chart

GIS Payout Ratio TTM data by YCharts

That’s a nice built-in inflation hedge. And right now it’s not something Treasuries and other high quality bonds with epic low yields can’t offer.

Carla Fried is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.



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