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BONDS OR DIVIDENDS?

BONDS OR DIVIDENDS?. Securities offered through LPL Financial. Member FINRA/SIPC. Stock investing involves risk including loss of principal. Why Have Investor’s Historically Preferred To Own Bonds?. Traditionally known as a “safe investment” Typically less volatile than stocks

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BONDS OR DIVIDENDS?

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  1. BONDS OR DIVIDENDS? Securities offered through LPL Financial. Member FINRA/SIPC. Stock investing involves risk including loss of principal.

  2. Why Have Investor’s Historically Preferred To Own Bonds? • Traditionally known as a “safe investment” • Typically less volatile than stocks • Offer regular interest payments • Have first priority in any liquidation The Safer Alternative to Bonds. Jim Royal (September, 2011)

  3. Is There Risk With Bonds? • Types of risks associated with bonds: Interest rate risk: The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship. Reinvestment risk: The risk that future coupons from a bond will not be reinvested at the prevailing interest rate when the bond was initially purchased. Reinvestment risk is more likely when interest rates are declining. Reinvestment risk affects the yield-to-maturity of a bond, which is calculated on the premise that all future coupon payments will be reinvested at the interest rate in effect when the bond was first purchased. Zero coupon bonds are the only fixed-income instruments to have no reinvestment risk, since they have no interim coupon payments. Inflation risk: The uncertainty over the future real value (after inflation) of your investment.  Credit/default risk: The event in which companies or individuals will be unable to make the required payments on their debt obligations. Downgrades: A negative change in the rating of a security. This situation occurs when analysts feel that the future prospects for the security have weakened from the original recommendation, usually due to a material and fundamental change in the company's operations, future outlook or industry.  Liquidity risk: The risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss. Source: Investopedia

  4. Trends in Bonds • Current trends within the bond environment: • Low interest rates: Interest rates below the level of inflation, making investors lose purchasing power as bonds decline in value when rates rise again. • 100-year bonds:Although these bonds offer higher interest rates, there is principal and business risk. • Weak bond covenants:Bond investors may accept weaker lending terms. The Safer Alternative to Bonds. Jim Royal (September, 2011)

  5. YIELD OF S&P500 STOCKS vs. 10-YEAR TREASURY YIELD Source: AAII, March 2015 Securities offered through Triad Advisors, member FINRA/SIPC. Advisory services offered through Lee Johnson Capital Management, LLC (LJCM). LJCM is an independent Registered Investment Advisor and is not affiliated with Triad Advisors.

  6. An Investor in Dividend Stocks or Bonds Will Have To Deal With Principle Fluctuations In Either Investment… So, In This Interest Rate Environment, Which Would You Rather Own, Dividend Stocks or Bonds?**In Both Cases, The Investor Has To Hold The Investment To Get The Yield.

  7. Average Dividend Yield from Indices, as of March 2nd, 2015 Indexarb.com, March2nd, 2015

  8. Market Definitions • S&P 500 Index: An index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. • Nasdaq 100 Index: An index composed of the 100 largest, most actively traded U.S companies listed on the Nasdaq stock exchange. This index includes companies from a broad range of  industries with the exception of  those that operate in the financial industry, such as banks and investment companies. • Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA was invented by Charles Dow back in 1896. Source: Investopedia

  9. 10-Year Treasury Yield 2.09 Yahoo.com As of March 2015

  10. Historical Comparison: Top 25 Dividend Stocks Q1-2015 vs. 10-Year Treasury Yield 4.59 2.61 Source: Yahoo.com

  11. What about Corporate Bonds? CORPORATE BONDS • Nominal yields on Treasuries and corporate bonds have dropped since recession • Maturity timeline required • In inflationary environment, bonds tend to do poorly. • Bond interest is taxed as high as 35% rate DIVIDEND STOCKS • Dividend yields of high quality equities have risen • Companies with strong balance sheet and stable earnings may fare better in an economic downturn • Equities will hold up much better in an inflationary environment • Current tax rate for qualified dividends is 15% or 0% • Potential for capital growth • Advantage of possibly raising current yields over time Seeking Alpha, June 2011

  12. Average yield-to-maturity for bonds= 3.52%, despite having an average coupon of 6.42% Average dividend yield of the same corporate borrowers is 4.03% Seeking Alpha, June 2011

  13. Key in a Dividend Strategy • Search for companies with strong fundamentals • Select stocks with stable dividend yield and growth • Unlike the bonds that are difficult to price, stocks are much easier to price • Underlying stock offers growth potential • Reinvest the dividends versus payout • Quarterly screening process for quality dividend stocks • Combination of high/low dividend yield, high/low dividend growth, and payout ratio

  14. Capital asset pricing model (capm) • A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities. • General idea behind CAPM: investors need to be compensated in two ways: time value of money and risk. • The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. • The risk is represented by beta and calculates the amount of compensation the investor needs for taking on additional risk (risk premium) • The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. Investopedia, March 2013

  15. Glossary of Terms • Coupon: The interest rate stated on a bond when it's issued. The coupon is typically paid semiannually.  • Yield Curve: A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth. • Yield to Maturity: The rate of return anticipated on a bond if it is held until the maturity date. YTM is considered a long-term bond yield expressed as an annual rate. The calculation of YTM takes into account the current market price, par value, coupon interest rate and time to maturity. It is also assumed that all coupons are reinvested at the same rate. Sometimes this is simply referred to as "yield" for short. • Zero Coupon Bond: A debt security that doesn't pay interest (a coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value.

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