Stock or bond: The best 6 blue-chips for investment income

When does buying the bond of a company make more sense than buying the stock? Money magazine examines industry-leading businesses to find out.

  • Exxon Mobil

    Dividend appeal. The stock’s 2.6% yield may not dazzle, but Exxon Mobil EXXON MOBIL CORPORATION XOM -0.24% has raised payouts every year for three decades — last year by 21%.

    There’s plenty of room for growth, given the company’s below-average 23% payout ratio.*

    If payout ratios are less than 40% or so (the S&P 500’s is 36%) that’s typically a sign dividends can climb at the same pace as earnings. Once the ratio drifts above 70%, there’s decidedly less room for growth.

    Stock risk. You should expect major ups and downs with any commodity-related stock. When oil prices were cut in half in the 2007-09 bear market, XOM shares sank. They lost far less, though, than the commodity itself and only half as much as the S&P 500, owing to the firm’s pristine balance sheet.

    Relate<a href="” title=””>d: Exxon Mobil profit is just short of recor<span class=”promo”>d

    With a market value of $400 billion, Exxon Mobil has less than $8 billion in long-term debt. Plus, the stock’s price/earnings ratio is 11, based on estimated earnings. That’s lower than its historical and sector average.

    Stock or bond? Stock. Mark Freeman, chief investment officer of Westwood Holdings Group, says XOM is a good source for income with inflation protection. As energy prices rise over time, so, too, should Exxon’s earnings and payouts.

    *Payout ratio: the percentage of current earnings used for dividends. The lower the ratio, the better the chance a business can deliver solid dividend growth<em>.

    At a glanc
    Bond yield to ma
    turity: 2.3% (matures 8/2021
    Stock dividen
    d yield: 2.6
    Dividend growth pr
    ospects: High

  • Coca-Cola

    Dividend appeal. Warren Buffett once said that “time is the friend of the wonderful business.” He was talking about Coca-Cola COCA-COLA COMPANY KO 0.21% .

    In 1995, Berkshire Hathaway’s KO holdings paid $88 million in dividends. Every year since, the soft-drink giant raised its payouts — in fact, it boosted them for 50 straight years.

    The result: Buffett’s Coke stake, which hasn’t changed since 1995, generated roughly $400 million in income last year.

    Stock risk. U.S. consumption of carbonated soda is starting to slow at the same time that Coke’s P/E of 18.1 is looking a tad bubbly. Still, that ratio is just a hair above the 17.5 P/E for beverage companies in the S&P 500, and it’s 5% below the company’s 10-year average.

    What’s more, Coke has a big edge in foreign markets, which account for 80% of profits. “Coca-Cola is well ahead of PepsiCo in establishing its international presence,” says Edward Jones analyst Jack Russo.

    Watch: Why Coke can still grow around the world

    Coke’s dividend streak should continue as profits have risen at a steady rate of 9% for the past five years.

    Dowe Bynum, co-manager of the Cook & Bynum Fund, says he also likes the fact that Coke’s business doesn’t require massive new investments and upgrades. “Soda, juices, and water are low-cost products,” he says.

    Stock or bond? Stock — as long as you have the patience to ride out downturns. In the last bear, KO shares sank 30%. Still, that was 25 points better than the S&P 500, and Coke actually raised its payouts in the crisis.

    At a glance

    Bond yield to maturity: 2.0% (matures 11/2020)
    Stock dividend yield: 2.9%
    Dividend growth prospects: High

  • Procter & Gamble

    Dividend appeal. At first blush, what’s not to love?

    Shares of the consumer products giant yield more than a point better than 10-year Treasuries. Procter & Gamble PROCTER & GAMBLE COMPANY PG 3.92% has raised its dividend for 56 consecutive years. And over the past five years, P&G shareholders have enjoyed a dividend growth rate more than triple the pace of inflation.

    Stock risk. Even with a compelling yield, the stock should give conservative income investors pause. Over the past four years the company’s annualized earnings growth nets out to zero.

    P&G’s lineup of premium products — which includes Bounty paper towels and Tide laundry detergent — hasn’t fared well since the financial crisis, as households have traded down to less expensive brands.

    To mollify shareholders, management has aggressively boosted dividends. Without profit growth, though, P&G’s payout ratio jumped from 46% at the end of its 2009 fiscal year to around 60%.

    “It’s a fine company with great brands, but those are mature, premium brands that are struggling with a more price-conscious consumer,” says Mike Foss, a portfolio manager for Brown Advisory. Finding the next generation of products will come at a cost: P&G’s operating expenses climbed from $24 billion in 2009 to $28 billion, cutting into the bottom line.

    Related: Top places for interns – P&G

    Another problem is that the stock now trades at a P/E of 18.2. That’s higher than the average for consumer staples stocks as well as P&G’s historical multiple.

    Stock or bond? Bond. The 2.2% yield to maturity on a P&G bond maturing in 2022 pays you more than 10-year Treasuries — while letting you sidestep the potential drama of the stock.

    At a glance

    Bond yield to maturity: 2.2% (matures 2/2022)
    Stock dividend yield: 3.0%
    Dividend growth prospects Moderate

  • General Electric

    Dividend appeal. In 2009 the conglomerate slashed its payout by 63% as flailing finance unit GE Capital inflicted a ton of hurt on earnings.

    Post-financial crisis, General Electric GENERAL ELECTRIC COMPANY GE -0.88% has shored up the capital base of that unit, reduced its reliance on finance, and is refocusing on growing its core business — industrial engines and power generation systems. Meanwhile, dividends have risen 22% annually in the past three years.

    Stock risk. Analysts think many facets of General Electric look compelling. The company’s accelerated sale of its remaining 49% stake in NBCUniversal to Comcast COMCAST CORP. CMCSA -0.31% includes $12 billion in cash. Management has announced plans to spend $10 billion to repurchase stock, and GE officials are also likely to keep mending their dividend fences.

    Watch: GE jumps on the shale bandwagon

    David Hone, manager of the William Blair Large Cap Value Fund, adds that the new smaller-sized and refocused GE deserves to sell at a higher P/E. It is at 13.8, which is below the 14 multiple for industrial stocks and GE’s long-term historical average of 16.

    Still, income investors can’t overlook the fact that GE’s financial unit still accounted for nearly a third of sales and 27% of profits in the fourth quarter of 2012. And many of the risks surrounding the financial sector have yet to be resolved.

    Stock or bond? Bond. Fort Pitt Capital senior equity analyst Kim Caughey Forrest points out that the company’s “financial stake might make GE stock more volatile than a conservative income investor wants to live with.”

    At a glance

    Bond yield to maturity: 2.7% (matures 10/2022)
    Stock dividend yield: 3.3%
    Dividend growth prospects Moderate

  • Intel

    Dividend appeal. The world’s largest semiconductor maker has gone from being a highflier to a high-yielder. Intel INTEL CORPORATION INTC -0.57% has boosted payouts at an above-average annual rate of 14% over the past five years, and the stock now pays a stunning point and a half more than the company’s 2021 bonds.

    Yet with a modest payout ratio of 39% — well below the 66% average for its industry peers — you can expect payouts to keep climbing.

    Stock risk. The dominant chipmaker for PCs (where growth is slowing) has been late to the game in developing energy-efficient chips for tablets and smartphones (where demand is booming). Playing catchup requires a boatload of investment. Intel spent $10.1 billion on research and development over the past year, a 79% increase from 2009.

    Last year, the stock sank 11%, dropping Intel’s P/E ratio to a below-average 10.2.

    Ironically, the rise of tablets could eventually benefit Intel, as growth in mobile devices means greater reliance on cloud computing. That, in turn, boosts demand for Intel chips for the servers that run the cloud.

    “Over the past 20 years Intel has crossed a lot of technology bridges,” says Brian McMahon, manager of Thornburg Investment Income Builder, which owns Intel stock. “I am willing to bet it will this time too.”

    Stock or bond? Stock — if you have at least a 10-year time horizon. While you’re waiting for this tech giant to make inroads in the mobile market, “you get paid 4% to wait,” says Michael Sheldon, chief market strategist at RDM Financial Group.

    At a glance

    Bond yield to maturity: 2.7% (matures 10/2021)
    Stock dividend yield: 4.3%
    Dividend growth prospects: High

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