Education >> Investing Your Money

Investors Flock to Bonds

I’m not lovin’ it

November 2010

Recent market volatility is making many people risk averse. Investors continue to sell their shares of stocks and stock funds and are pouring record amounts into bonds and bond funds.

Consider McDonald’s. It raised $750 million in a bond sale in July. The bonds pay 3.5% in annual interest. The bonds were hugely popular, and McDonald’s raised the money easily. But what’s interesting is that McDonald’s stock, at the time of the bond sale, was paying dividends equal to 3.2% per year, according to StreetInsider.com.

In other words, you could buy the stock and get a dividend of nearly the same amount as the bond, with the possibility that your investment will rise in value over time. Or you could buy the bond, where you’d never see the value of your investment rise.

I am not suggesting that you buy McDonald’s stock or its bonds. (You should not invest in individual securities; instead you should diversify broadly.) Instead, I am making a simple point: Too many people are focused on bonds and afraid of stocks.

McDonald’s is not the only example. In September, Johnson & Johnson sold 10-year 2.95% bonds; its stock’s dividend yield was 3.66%, according to InvestmentNews. Kraft had a dividend yield of 3.79%, 0.15 points more than its bonds that expire in February 2018. DuPont’s stock dividend of 3.86% compares favorably to its bond yield of 3.27% for bonds expiring in January 2020.

Yet too many people aren’t taking advantage of this fact. Instead, investors sold $9.5 billion from stock funds during the week ending September 1, according to the Investment Company Institute — an ongoing trend since the credit crisis that began in November 2007.

It’s ridiculous! In many cases you’ll get the same interest with stocks as you would get in bonds, plus you’ll have the opportunity for growth. It should be a no brainer.

The next time you hear about everyone rushing to bonds, remember to consider the growth power potential of stocks and the added benefits of dividends. Your portfolio is designed to help you reach your long-term goals. Stocks are an important way of making that happen.  Bond prices may be adversely affected by increasing interest rates if not held to maturity.  Remember, all investments involve risk, including the loss of principal.

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