Finding Returns in a Yield-Starved World—Part II

Several months ago we wrote a short column about the search for yield in a negative-yield world. While rates have risen appreciably in the last few months, they still provide investors with a paltry return. Some countries in fact STILL sport negative yields (German and Japanese short-term money market rates are -0.72 and -0.22 percent respectively). About a year ago, 3 and 6-month Treasury bills yielded less than 10 basis points (0.10 percent). But since the fall election fireworks, they have worked their way back to 0.53 percent and 0.61 percent, respectively—a nice hike, but still leaving income investors starving for return. Imagine having a million-dollar nest egg and investing in T-bills, and getting between $5,000 and $6,000 annual income. Not too long ago, that same million would have gotten you $50,000 to $60,000 a year in income. All along the Treasury yield curve, rates are edging higher and should they continue, those holding longer maturity Treasuries, such as the 10-year note and 30-year bond, will see the value of their investment plummet. (Prices move inversely with yields.) The recent move higher has wiped out at least a year of interest payments for investors depending on their initial entry point. In light of this, we decided to write an update about some of the relatively fat yields the healthcare sector offers.

Are higher yields available with comparable risk? The answer is an emphatic “yes.” We have assembled a portfolio (see below) of healthcare issues which have substantially higher yields than the longest dated Treasury maturities. In addition, stock investors enjoy the potential for capital gains as well as fat yields. Are there risks with this portfolio? The answer again, is “yes,” but in our opinion, these risks are not much greater than holding 10 or 30-year Treasury instruments in a rising rate environment. Many of them are the bluest-of-blue chips and have long operating histories. But perhaps the most critical issue is that the dividend yields help compensate for the increased risk. In the last bear market, back in the late 1970s and early 1980s, Treasuries lost half their value. Granted, if held to maturity, Treasuries investors usually receive their full investment in return, along with all coupon payments.

CompanyYield

Glaxo Smith Kline (Big Pharma) 5.32%
Welltower (healthcare real estate investment trust) 5.14%
Ventas (healthcare real estate investment trust) 5.01%
Astra Zeneca (big pharma) 4.94%
Sanofi (big pharma) 4.01%
Pfizer (big pharma) 3.94%
Novartis (big pharma) 3.75%
Merck (big pharma) 3.02%
30 year U.S. Treasury Bond 2.99%
10 year U.S. Treasury Note 2.39%

Source: ISAW research

One minor caveat… some of these issues, namely Sanofi, Novartis and Astra Zeneca, are foreign domiciled firms and might be subject to foreign dividend withholding. I have held several of these over the years (Novartis for one) and the tax headaches were minimal.

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