BONDS OR DIVIDENDS?.

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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, July 2018

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 September 27th 2018 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 24,472,688.690 481,510.037 1.97 [Floating Capitalization Weighted: stock price and per-share dividend are multiplied by the number of floating shares and then scaled to millions.]  Nasdaq 100 11,448,104.082 124,243.674 1.09 [Modified Cap. Weighted: stock price and per-share dividend are multiplied by the Nasdaq weight factors and then scaled to millions.]  Dow Jones 3,891.320 89.067 2.29 [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, September 2018

Trading View September 28th, 2018 10-Year Treasury Yield 3.06 Trading View September 28th, 2018

Historical Comparison: Top 25 Dividend Stocks Q3/2018 vs Historical Comparison: Top 25 Dividend Stocks Q3/2018 vs. 10-Year Treasury Yield 3.83 2.83 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 10/1/2018   TICKER COMPANY Growth Score Yield Score Dividend Yield TOTAL SCORE Beta Rf* Rm CAPM BGCP BGC Partners, Inc. 69.0833 93.00 6.00 81.04 1.02 2.09 0.7113 0.6837 T AT&T Inc. 61.9167 77.46 0.40 1.5385 AVGO Broadcom Inc 69.9722 83.00 3.00 76.49 0.94 0.7940 BX Blackstone Group LP 58.8889 75.94 1.37 0.2012 ABBV AbbVie Inc 63.5000 88.00 4.00 75.75 1.54 -0.0332 VZ Verizon Communications Inc. 60.1944 89.00 4.40 74.60 0.69 1.1387 VLO Valero Energy Corporation 65.1944 82.00 2.70 73.60 0.98 0.7389 LAZ Lazard Ltd 59.6389 87.00 3.70 73.32 1.79 -0.3779 PRU Prudential Financial Inc 59.4167 3.60 73.21 1.49 0.0357 AYR Aircastle Limited 53.2500 92.00 5.40 72.63 1.80 -0.3916 RDS.B Royal Dutch Shell plc (ADR) 48.8611 5.80 70.93 1.06 0.6286 IBM International Business Machine 52.1111 4.20 70.56 0.87 0.8905 ETN Eaton Corporation PLC 56.7778 84.00 70.39 1.38 0.1874 PFE Pfizer Inc. 56.3611 3.20 70.18 0.96 0.7665 BUD Anheuser Busch Inbev NV (ADR) 48.5000 91.00 4.80 69.75 0.93 0.8078 ORI Old Republic International Cor 53.3333 86.00 3.40 69.67 1.22 0.4080 PEP PepsiCo, Inc. 53.4444 85.00 69.22 0.66 1.1801 IP International Paper Co 47.8889 66.94 1.50 0.0220 MSFT Microsoft Corporation 62.0556 71.00 66.53 1.25 0.3666 JPM JPMorgan Chase & Co. 50.6111 2.80 66.31 1.16 0.4907 KKR KKR & Co Inc 49.9444 80.00 2.50 64.97 1.63 -0.1573 WMT Walmart Inc 51.7222 77.00 2.20 64.36 0.51 1.3869 KO The Coca-Cola Co 39.1111 62.56 0.74 1.0698 CSCO Cisco Systems, Inc. 39.6667 60.83 GM General Motors Company 32.6111 60.81 1.55 -0.0470 Rf Current Portfolio Yield: 3.824 1.14 0.5183% Per Month Treasury Bill Rate - 4 weeks 9/25/2018 CAPM of Portfolio 6.40% Annualized Current Portfolio Yield 3.82% * Growth and Yield Score based on 4Q/2018 Screening Expected return of the Portfolio 10.22%

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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