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|