Predictable cash flow is one of the many positive attributes of investing in bonds. While common stocks should never be considered an apples-to-apples substitute for fixed-income, there are certain kinds of companies that possess bond-like attributes. Business models with strong recurring revenues or contractual obligations can be ideal choices for investors looking for strong dividend durability.
In no certain order, here are a variety of stocks that may appeal to bond investors. Don’t expect strong price appreciation out of any of these names, but do expect the same level of income predictability that you might expect from a bond. An added appeal from most of these stocks is the potential for dividend growth. So while a bond pays a stated, static rate of interest over a period of time, dividend stocks offer the chance for increasing income over time.
To see a list of high yielding CDs go here.
1) AT&T (T) – Currently yielding a bit above 5%, AT&T’s consumer (wireless and broadband) and business services model continues to plug away. The company’s plan to acquire DirecTV should bolster and further solidify cash flow and dividend growth for investors.
2) Realty Income (O) – With a market cap of roughly $10 billion, Realty Income is one of the nation’s largest real estate investment trusts, or REITs. The company leases mostly stand alone properties to investment grade clientele like Fedex, CVS, and Walgreen’s. The contracts are typically long-term in nature with annual rent escalators that provide dividend growth opportunity for investors.
3) Procter & Gamble (PG) – At a yield of about 3%, Procter and Gamble is the world’s largest consumer products manufacturer. With well known brands like Pampers and Luvs, Charmin, as well as Tide, Cascade, and Gillette, P&G products are found in most households around the world. The company has 23 brands with annual sales of $1-10 billion and 14 more that generate $500-$1 billion each.
4) ExxonMobil (XOM) – While there are many integrated oil companies that basically act as cash printing presses (Chevron, BP, Royal Dutch Shell are some others), at a market cap of $400 billion, XOM is the largest. With a yield of 2.95%, Exxon’s payout is smaller than some of the others, but it balances the attack with a strong stock buyback program. YTD the company has generated earnings of $26 billion, free cash flow of nearly $20 billion, and paid out about $17.5 billion to shareholders.
5) Prospect Capital (PSEC) – Okay, this is the oddball pick. Prospect Capital is a business development company, or BDC, that primarily lends money to small, closely-held companies. Business development companies are really akin to high-yield bond funds since they see recurring payments from not-so-credit-worthy operations or partners. At a yield of 13.5%, Prospect does not come without risk. The company has actually been paying out more than it has been bringing in, so the possibility exists that the dividend could be cut. Still, for aggressive investors, this might represent a way to really juice an income stream.
While there is rationale for being a shareholder in each of these companies, with the stock market trading at somewhat nosebleed valuations, I don’t consider any one of them table pounding buys. I would probably take a dollar cost average approach and move into a position over time in case the long predicted market sell off comes to fruition.
In any case, each of the five companies mentioned here does generate bond-like revenue and would be a reasonable choice for conservative income investors, with the exception of Prospect, which would be reserved for more aggressive types. At the end of the day since many, perhaps most, income investors have exposure to both stocks and bonds, asset allocation becomes a critically important aspect of cash flow production. The choice between equity and fixed-income can be a rather difficult one, but it is an important one.
About the author: Adam Aloisi has over two decades of experience investing in equities, bonds, and real estate. He has worked as an analyst/journalist with SageOnline Inc., Multex.com, and Reuters and has been a contributor to SeekingAlpha for better than two years. He resides in Pennsylvania with his wife and two children. In his free time you may find him discussing politics, playing golf, browsing antique shops, or traveling.