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Buy Dividends or US Treasuries?

Updated on April 13, 2012

Dividend Machine or 10 Year US Treasury?

My theory is that if you buy stocks to provide income, they should pay you more income than you get from a 10-year U.S. treasury.

Currently a 10 year U.S. treasury pays about 2%. However, things can change quickly and you might be able to buy a 10 year U.S. treasury bond with a coupon of 3% at par or better.

The best case scenario is you receive your 3% income; interest rates go down and you sell the bond at a profit. Do think that will happen? Consider these two facts: (1) when interest rates go up bond prices go down, when interest rates go down bond prices increase that means if interest rates go to 1% your will get a profit. (2) interest rates are at a 30 year low which suggests it is unlikely that interest rates will go significantly lower. My guess is this scenario has a limited chance of success.

Another scenario is to receive your 3% income per year for 10 years and when the bond matures, the government returns your original investment. This outcome is highly likely...almost no risk.

You never know what the future will bring. You could be happy with a 3 percent yield; you could be disappointed. You should get your money back in 10 years. Your risk is the loss of income from a good dividend machine. Dividend machines pay 3 percent at a minimum but increase the payout every year.

Both investments can lose money. You all know how easy it is to buy a great company today and suffer through stock price declines. Bonds can do the same thing to you. If you buy a 10 year treasury at 3% and the government starts selling treasuries with a yield of 5% your 3% investment will lose value. A dividend machine, unlike a bond, can increase your income every year.

I believe that you can pick several investments over time that are designed to provide you with income that increases over time, and in this day and age it will probably be a dividend machine.

Look at Johnson and Johnson (JNJ); JNJ pays over 3%. Moreover, income from dividends have increased every year for 49 years. Naysayers will suggest that Johnson and Johnson (JNJ) is dead money. But I like income that increases every year.

Check out my blog on JNJ.

Dividend Machine alternative to 10y year U.S. Treasury September, 2011 NJR

NJR will pay a dividend of $.36 on October 3, 2011 if you own it by September 13, 2011.NJR has increased the dividend every year for at least five years and at the close on Friday July 22, 2011, NJR fetched $45.86 per share.NJR earns (out of New Jersey resident deposits) a $1.92 and pays stockholders a $1.42 for a yield of 3.41 percent. Their D/E ratio is .75, which is very respectable for a utility.

Just another example of simple income investing.

Very Truly Yours,



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