Nearly all the juice has been squeezed out of bonds. This leaves income-oriented investors searching elsewhere and increasingly they’re turning to dividend-paying stocks and funds.
Today’s chart compares two electronically traded funds (ETFs). One is the Vanguard Dividend Appreciation fund (NYSE: VIG). This, as its name suggests, is a fund of dividend-paying stocks, including Wal-Mart, Coca-Cola, IBM and Chevron.
The other is the iShares Barclays Aggregate Bond fund (NYSE: AGG). This fund invests in bonds – some corporate bonds, from the likes of Verizon and Bellsouth – but mainly U.S. Treasury bonds and government-sponsored enterprise debt, like Fannie and Ginnie Mae.
Both ETFs provide an annual yield of a little more than 2%, which makes them close enough for an apples-to-apples comparison.
Here’s a ratio chart comparing the relative performance of the two funds. The ratio is calculated as:
As you can see, since 2009, investors have increasingly favored dividend-paying stocks over chasing paltry bond yield. VIG has doubled in price since then, while AGG has increased just 25% from its 2008 lows.
I expect this trend to continue as long as the Fed keeps its thumb on interest rates and investors seek income… both of which seem like an easy bet at this stage of the game.
If you haven’t done so already read the Survive & Prosper issue on “Hate the General Equity Markets? “
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