Remedy for Low-to-zero Interest Rates

BREXIT has come and gone, and despite the hiccup in the U.S. stock market, we are back to within a few points of new all-time highs (as of the close of July 8th, 2016). Another market made historical moves as well and that was the fixed income market. The 10-year U.S. Treasury note yield now stands at 1.35% – just above its all-time low reached earlier in the week. All around the world, the shockwave of low to negative interest rates continues. In the U.K., 10-year rates sit at 0.73%. Germany is at -0.19%, and Japan is -0.29%. Imagine after 10 years of holding a note, you got back less than you invested – some investment !!

Also, should interest rates ever head back up in a meaningful way, the losses on those instruments will be significant (as interest rates move inversely with bond/note prices). At In Sickness and Wealth, we have put together a sort of “treatment” for low interest rates. There are many high quality healthcare issues with dividend yields that are 25-35 times higher than a typical money market instrument. Yes, there is risk. If you collect 3% in dividends but the stock tanks 15%, you will still have a loss, albeit a mitigated loss. That’s the nature of investing. You take risks. You hopefully get rewarded. Personally, I’d take the 2.6% dividend yield that Johnson and Johnson pays, over the yield of a 10-year Treasury note ANY DAY… although some readers might disagree! The figure below is a sampling of mostly large cap stocks that offer dividend yields above 2.5%. While most of the dividends are safe and are not likely to be cut, outsized dividends should always be scrutinized carefully.

For example, Glaxo Smith Kline has a whopping dividend yield of 5.07%. Glaxo is a high quality big pharma company with a long operating history and solid fundamentals. However, its payout ratio is getting dangerously high, and in any serious business downturn, it would be a candidate for a dividend cut. Others on the list are Healthcare REITs and have very juicy dividends for a reason. REITs, or real estate investment trusts, by law, are required to pay out 90% of their profits as dividends to the REIT shareholders. In future issues of In Sickness and Wealth, we will take a closer look at healthcare REITs, as they are excellent income vehicles. Safe investing to you all!

Company Name Ticker Dividend Yield (%) Comments
Medical Properties Trust MPW 6.90 Hospital Properties REIT
Physicians Realty Trust DOC 5.80 Medical Office Buildings REIT
Ventas VTR 5.30 High quality REIT
Glaxo Smith Kline GSK 5.07 High payout ratio—dividend at risk
Welltower HCN 4.90 Diverse asset and tenant base REIT
Healthcare Trust HTA 4.60 Medical office buildings REIT
Abbvie Inc ABBV 3.59 Big pharma
Pfizer PFE 3.35 Solid drug company
Merck MRK 3.13 See July issue of ISAW for summary
Novartis NVS 2.82 Very strong Swiss-based company
Sanofi Aventis SNY 2.74 French-based big Pharma
Johnson and Johnson JNJ 2.63 The most dominant healthcare franchise
Eli Lilly LLY 2.57 Stalwart big Pharma, big diabetes franchise
Amgen AMGN 2.55 Big biotech, good growth potential

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