Day 43: Buy Bond Market Equivalents
The Mother's Little Helper portfolio was up today (0.77%) +$4,721.10 for an overall gain of +$17,248.03 (+2.86%). Mom is very happy.
You know the old saying, "The days are long but the years are short". I don't think this has held true for the bond market. It's been a really long decade of a bull market in bonds. A combination of low inflation, low interest rates and fear have kept the bond market on a tear for the last decade but now the cracks in the dam are beginning to show. My metaphor isn't a reference to the Oroville dam, though that is front of brain for many in California. My point is that there are alternatives to investing in bonds and those alternatives are most likely a lot safer now that rates are going up. The primary alternative are stocks that pay dividends as high or higher than their bond market equivalents. My preference is for bond equivalents that also provide some possibility of appreciation. Bonds by definition will never appreciate, but the rate they pay can depreciate if rates go up and or inflation increases than your bond yield is robbed. For those who haven't been listening to the news, all efforts are on increasing inflation to 2-2.5%.
My favorite bond market equivalent right now is Cisco systems. The old tech stalwart that made the internet possible with sexy and mesmerizing technology like switching gear and routers. Laugh if you like but that stuff helped build the connected world we now take for granted. I've been invested in Cisco for last two years in what can best be described as a sideways trade. Every dip below $27 I bought shares and held on while gritting my teeth. During that time CEO Chuck Robbins has been leading a transformation of Cisco from the legacy switching gear to a cloud based company that will lead the next evolution of tech and the internet of things. I still hold that that thesis is correct and on track.
Cisco has not broken out, not by a long shot, but right now it feels like a coiled spring ready to move up to a proper valuation with a higher multiple. Todays earnings call made it clear that Cisco Systems is on track and steadily achieving the goal of transforming Cisco into an all new powerhouse within the world of cloud computing. Throw in some repatriated cash from abroad and a better tax rate and Cisco will be one of the biggest winners of 2017 and throughout 2018. Right now Cisco trades at a discount by most valuation measures and pays you nice 3.30% dividend while you wait for the breakout. By the way, they just raised the dividend today.
- Price/Earnings: 15 vs. 36 for its peers; a discount.
- Price/Cash Flow: 11.68 vs. 15 for its peers; a discount.
- Price/Projected Earnings: 12.75 vs. its peers at over 20; a discount that could be a mis-price.
- Price/Book: 2.50 vs. 3.75 for it's peers.
- Earnings growth: 12.90 vs. 8.75; Cisco is expected to have earnings growth significantly higher than its peers.
Not often does a company of Cisco's quality come along with such a great setup as this for an investor. Earn 3.30%+ on your investment, watch the stock price appreciate over time and know that your invested in a part of the internet that is not a fad, it's the core engine that connects us all.
Some other bond market equivalents I like are:
- Verizon: dividend 4.73%.
- Pfizer: dividend 3.95%.
- Chevron: dividend 3.84%.
- Boeing: dividend 3.45%.
- Coca-Cola: dividend 3.39%.
- IBM: dividend 3.16%.
- ExxonMobil: dividend 3.66%.
- Caterpillar: dividend 3.27%.
- Merck: dividend 2.91%.