Falling share prices have pushed yields on household names like Pfizer, PepsiCo and Kimberly-Clark to levels income investors have not seen in years. A high yield is the market asking a question. We ran one number on eight of them to answer it.
That's a good question and that's actually the second point in the article. Here are two things to know about TR28.
Firstly, the 6% is the coupon rate. The actual return at maturity is lower. If you buy at 103.39, you're paying more than the 100 you'll get back in December 2028, plus about 2.1 in accrued interest. That gives a yield to maturity of about 4.3% per annum. The current yield is 5.8%.
Secondly, the tax issue. If you're a UK taxpayer and you hold this outside of an ISA or SIPP the full 6% coupon is income taxable. You can't claim the drop from 103.39 to 100 as a loss as gilts aren't subject to CGT. That's why so many UK taxpayers go for the low-coupon gilts trading below 100.
For US investors, the comparison is a two-year Treasury yielding around 4.8% with no currency risk. Our analysis shows that none of the eight stocks satisfies both criteria. Pfizer (6.1%) and Kimberly-Clark (5.3%) both offer higher yields than the bond, but their dividends are only covered 1.1 times. If you're looking for income over the next two years, the bond is clearly the safer bet. The stocks only make sense if the dividends can be funded from free cash flow.
Very thorough, thank you. I hold in SIPP, and like the fact you can move into stocks if opportunities come up. I hold several dividend stocks (PFE, KMB, WU, KHC, CPB), they haven’t been holding well as yields are up.
Thanks. As you're using a SIPP, the tax issue is irrelevant. For you, TR28 should give around 4.3% per annum in sterling until 2028, with no currency risk.
You're absolutely right. Over the last year the US 10yr yield went from about 4.1% to 5.2%. Four of your five stocks were down: Campbell's -36%, Western Union -25%, Kimberly-Clark -18%, Kraft Heinz -11%. Pfizer was the only one up at +15% and the S&P 500 was up 17%.
We looked at the three stocks not covered in the article, using their reported cash flow for the past 12 months:
- Kraft Heinz has a 7.1% yield and the dividend is covered around 2x on a cash flow basis.
- Western Union 15.4%, dividend covered about 1.4x on cash flow.
- Campbell cut its dividend by 36% in September to $0.25 per quarter (yielding 5.3%) in order to pay down debt. Last year's free cash flow was more than twice that of the dividend.
Pfizer and Kimberly-Clark both had dividend coverage of 1.1x, according to the article.
The point from your list is that prior cash flow coverage establishes a floor, it doesn't set a forecast. Campbell had 1.4x coverage when it cut its dividend. Western Union is at 1.0x coverage now, but with a 15% yield the market is clearly expecting its cash flow to decline.
One SIPP point to be aware of: under the UK-US tax treaty, dividends paid by a US company to a pension scheme are exempt from US withholding tax. Not all platforms will apply this.
This isn't any advice on your holdings, just a look at what the numbers tell us.
Why dividend stocks rather than treasury bonds? TR28 (British govt bond, Dec 2028) pays 6% coupon and costs 103.39%
That's a good question and that's actually the second point in the article. Here are two things to know about TR28.
Firstly, the 6% is the coupon rate. The actual return at maturity is lower. If you buy at 103.39, you're paying more than the 100 you'll get back in December 2028, plus about 2.1 in accrued interest. That gives a yield to maturity of about 4.3% per annum. The current yield is 5.8%.
Secondly, the tax issue. If you're a UK taxpayer and you hold this outside of an ISA or SIPP the full 6% coupon is income taxable. You can't claim the drop from 103.39 to 100 as a loss as gilts aren't subject to CGT. That's why so many UK taxpayers go for the low-coupon gilts trading below 100.
For US investors, the comparison is a two-year Treasury yielding around 4.8% with no currency risk. Our analysis shows that none of the eight stocks satisfies both criteria. Pfizer (6.1%) and Kimberly-Clark (5.3%) both offer higher yields than the bond, but their dividends are only covered 1.1 times. If you're looking for income over the next two years, the bond is clearly the safer bet. The stocks only make sense if the dividends can be funded from free cash flow.
Very thorough, thank you. I hold in SIPP, and like the fact you can move into stocks if opportunities come up. I hold several dividend stocks (PFE, KMB, WU, KHC, CPB), they haven’t been holding well as yields are up.
Thanks. As you're using a SIPP, the tax issue is irrelevant. For you, TR28 should give around 4.3% per annum in sterling until 2028, with no currency risk.
You're absolutely right. Over the last year the US 10yr yield went from about 4.1% to 5.2%. Four of your five stocks were down: Campbell's -36%, Western Union -25%, Kimberly-Clark -18%, Kraft Heinz -11%. Pfizer was the only one up at +15% and the S&P 500 was up 17%.
We looked at the three stocks not covered in the article, using their reported cash flow for the past 12 months:
- Kraft Heinz has a 7.1% yield and the dividend is covered around 2x on a cash flow basis.
- Western Union 15.4%, dividend covered about 1.4x on cash flow.
- Campbell cut its dividend by 36% in September to $0.25 per quarter (yielding 5.3%) in order to pay down debt. Last year's free cash flow was more than twice that of the dividend.
Pfizer and Kimberly-Clark both had dividend coverage of 1.1x, according to the article.
The point from your list is that prior cash flow coverage establishes a floor, it doesn't set a forecast. Campbell had 1.4x coverage when it cut its dividend. Western Union is at 1.0x coverage now, but with a 15% yield the market is clearly expecting its cash flow to decline.
One SIPP point to be aware of: under the UK-US tax treaty, dividends paid by a US company to a pension scheme are exempt from US withholding tax. Not all platforms will apply this.
This isn't any advice on your holdings, just a look at what the numbers tell us.