Haverford Trust likes stocks that yield more than bonds
Haverford Trust executive bullish on stocks
With continued mixed economic data dribbling into the market, Hank Smith, Haverford Trust’s chief investment officer, said we should expect more volatility than in the last few years. But, overall, he is extremely bullish on the stock market.
Overseeing $7 billion in client assets, Smith is a classic equities bull. Stocks still remain the best asset class, he said:
“Tailwinds are in U.S. stocks’ favor with reasonable valuations, great balance sheets, decent earnings growth, dividend increases and share buybacks, an accommodative [Federal Reserve], and very little risk of a recession.”
Where to buy? Smith likes so-called old technology companies and industrial sectors balanced with defensive sectors like health care.
“Any pullbacks should be short-lived, because there are a lot of investors who missed the bull market” that started after the crisis of 2008, Smith claimed. “We are five years from that bear market. There is healing taking place.”Haverford has traditionally favored equities over fixed income for its clients, and Smith said that was because the investment shop owns bonds mostly to “reduce volatility in a portfolio.”
Moreover, he said, some stocks today are yielding just as much – if not more – than their company’s corporate bonds. You would have to reach back to the mid-1950s for a similar period, when many stocks yielded more than bonds as a trade-off for the risk of investing in equities, he added.
Take McDonald’s Corp. (symbol: MCD), shares of which have a dividend yield of 3.4 percent, whereas a corporate bond issued by McDonald’s and maturing in, say, 2022, carries a 2.9 percent coupon.
“You get more yield owning the stock than the bond. If you buy the bond, you get the coupon for years. You’re not taking much risk,” Smith said.
“But McDonald’s dividend yield has increased every year, and that will likely continue,” perhaps as much as 8 percent to 10 percent annually, Smith said.
Through annual dividend increases and compounding, the total return on McDonald’s stock would be higher than the bond over the same period.
“So, if you own the stock for just as many years as the bond, you get 7 percent, even if the stock does nothing,” Smith said.
The trade-off? You, as an investor, experience more volatility for that period.
Haverford highlights other holdings for which the shares yield more in dividends than do the corporate 10-year bonds: Microsoft, Philip Morris, Mattel, Intel, Procter & Gamble, and Coca-Cola.
In fixed income, Haverford owns very few Treasury bonds for clients.
“It is the most overvalued asset class,” Smith said, adding that the firm was willing to miss any short-term rallies in Treasuries.