BONDS OR DIVIDENDS?

Why Have Investor’s Historically Preferred Bonds? Traditionally known as a “safe investment” Typically less volatile than stocks Offer regular interest payments Have first priority in any liquidation The Safer Alternative to Bonds. Jim Royal (September, 2011)

Is There Risk With Bonds? Types of risks associated with bonds: Interest rate risk, reinvestment risk, inflation risk, credit/default risk, rating downgrades and liquidity risk. The Safer Alternative to Bonds. Jim Royal (September, 2011)

Trends in Bonds Current trends within the bond environment: Low interest rates: Interest rates below the level of inflation, making investors lose purchasing power as bonds decline in value when rates rise again. 100-year bonds: Although these bonds offer higher interest rates, there is principal and business risk. Weak bond covenants: Bond investors may accept weaker lending terms. The Safer Alternative to Bonds. Jim Royal (September, 2011)

YIELD OF S&P500 STOCKS vs. 10-YEAR TREASURY YIELD Source: AAII, February 2017

An Investor in Dividend Stocks or Bonds Will Have To Deal With Principle Fluctuations In Either Investment… So, In This Interest Rate Environment, Which Would You Rather Own, Dividend Stocks or Bonds? **In Both Cases, The Investor Has To Hold The Investment To Get The Yield.

Average Dividend Yield from Indices, as of June 2017 Index Aggregate Value of Index Components Aggregate Dividends Dividend Yield (%)   [S&P and Nasdaq in millions. [Next four quarters] [Aggregate Dividends divided by Aggregate Value] Dow Jones in units.]  S&P 20,705,401.926 431,625.479 2.08 [Floating Capitalization Weighted: stock price and per-share dividend are multiplied by the number of floating shares and then scaled to millions.]  Nasdaq 100 8,203,609.800 95,541.068 1.16 [Modified Cap. Weighted: stock price and per-share dividend are multiplied by the Nasdaq weight factors and then scaled to millions.]  Dow Jones 3,070.750 77.724 2.53 [Price Weighted: Sum of prices and dividends of stocks in the DJIA index. (N.B. Divide stock price sum by the DJIA divisor to get the index value.) ] Indexarb.com, May 31st, 2017

10-Year Treasury Yield 2.21 Yahoo! May 31st, 2017

Historical Comparison: Top 25 Dividend Stocks Q2-17 vs Historical Comparison: Top 25 Dividend Stocks Q2-17 vs. 10-Year Treasury Yield 3.90 2.35 Source: Yahoo.com

TOP 25 DIVIDEND PORTFOLIO PERFORMANCE - % RETURN Source: Yahoo Finance

What about Corporate Bonds? Nominal yields on Treasuries and corporate bonds have dropped since recession Maturity timeline required In inflationary environment, bonds tend to do poorly. Bond interest is taxed as high as 35% rate DIVIDEND STOCKS Dividend yields of high quality equities have risen Companies with strong balance sheet and stable earnings will sustain in an economic downturn Equities will hold up much better in an inflationary environment Current tax rate for qualified dividends is 15% or 0% Potential for capital growth Advantage of possibly raising current yields over time Seeking Alpha, June 2011

Average dividend yield of the same corporate borrowers is 4.03% Average yield-to-maturity for bonds= 3.52%, despite having an average coupon of 6.42% Average dividend yield of the same corporate borrowers is 4.03% Seeking Alpha, June 2011

Key in a Dividend Strategy Search for companies with strong fundamentals Select stocks with stable dividend yield and growth Unlike the bonds that are difficult to price, stocks are much easier to price Underlying stock offers growth potential Reinvest the dividends Quarterly screening process for quality dividend stocks Combination of high/low dividend yield, high/low dividend growth, and payout ratio

Expected Return on Dividend Portfolio As of: 6/1/2017 RANK #   TICKER COMPANY Growth Score Yield Score Dividend Yield TOTAL SCORE Beta Rf* Rm CAPM 1 MIC Macquarie Infrastructure Corp 63.1667 95.00 6.79 79.08 0.88 0.73 0.7009 0.7044 2 VLO Valero Energy Corporation 58.8889 91.00 4.15 74.94 1.38 0.6898 3 RAI Reynolds American, Inc. 62.6667 87.00 3.06 74.83 0.39 0.7186 4 BGCP BGC Partners, Inc. 55.1667 94.00 6.13 74.58 1.32 0.6915 5 ENB Enbridge Inc (USA) 55.8889 5.82 73.44 0.63 0.7116 6 QCOM QUALCOMM, Inc. 56.1944 90.00 3.98 73.10 1.27 0.6930 7 LAZ Lazard Ltd 57.7500 88.00 3.68 72.88 1.93 0.6738 8 KKR KKR & Co. L.P. 56.9167 3.65 72.46 1.64 0.6822 9 CSCO Cisco Systems, Inc. 57.7222 3.66 72.36 1.40 0.6892 10 GIS General Mills, Inc. 57.3611 3.39 72.18 0.57 0.7134 11 ORI Old Republic International Cor 54.8056 89.00 3.89 71.90 1.11 0.6977 12 IP International Paper Co 54.3056 3.47 71.15 1.49 0.6866 13 GSK GlaxoSmithKline plc (ADR) 49.2500 93.00 4.49 71.13 0.98 0.7014 14 ABBV AbbVie Inc 49.5556 3.88 69.78 1.54 0.6851 15 IBM International Business Machine 52.8333 86.00 3.95 69.42 0.96 0.7020 16 MSFT Microsoft Corporation 57.1111 81.00 2.22 69.06 1.04 0.6997 17 KO The Coca-Cola Co 49.7222 3.26 68.86 0.67 0.7105 18 RDS.B Royal Dutch Shell plc (ADR) 41.4444 96.00 6.65 68.72 1.15 0.6965 19 INTC Intel Corporation 52.1944 85.00 3.01 68.60 1.01 0.7006 20 GM General Motors Company 45.1944 4.53 67.60 1.28 0.6927 21 WFC Wells Fargo & Co 53.1111 82.00 2.91 67.56 0.94 0.7026 22 JPM JPMorgan Chase & Co. 52.3056 78.00 2.38 65.15 1.44 0.6880 23 GE General Electric Company 43.1944 3.51 64.60 1.18 0.6956 24 WMT Wal-Mart Stores Inc 37.6667 2.61 61.33 0.11 0.7268 25 CS Credit Suisse Group AG (ADR) 24.5833 92.00 4.95 58.29 Rf Current Portfolio Yield: 4.001 0.6976% Per Month Treasury Bill Rate - 4 weeks 5/31/2017 CAPM of Portfolio 8.70% Annualized Current Portfolio Yield 4.00% * Growth and Yield Score based on 2Q/2017 Screening Expected return of the Portfolio 12.70%

Capital Asset Pricing Model (CAPM) A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities. General idea behind CAPM: investors need to be compensated in two ways: time value of money and risk. The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The risk is represented by beta and calculates the amount of compensation the investor needs for taking on additional risk (risk premium) The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. Investopedia, October 2013

No strategy can guarantee profit or protect against a loss. Past performance is not indicative of future results.

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