With the uproar in Europe continuing unabated, the rush into the safety of bonds through “safe” countries like Germany and the U.S. is doing much to distort the mechanism of the financial markets, throwing a monkey wrench into the investment strategy of many people. With the yield of the 10-year Treasury now trading at approximately 1.55% and nations like Germany having 10-year yields of 1.2%, one must be careful not to make the common mistake in one’s investment strategy of running for cover and not looking out into the horizon.
When taking into account inflation, investing your money in 10-year Treasury notes at just 1.55% could be a very costly mistake. You are essentially willing to make no money after inflation and perhaps even lose money. The rush into the 10-year Treasury does not consist of small retail investors, but rather large institutions that are parking their money until a better opportunity arises. As a small retail investor, I would caution against following the large funds; in fact, I like to go against them. They are like massive boats; very slow to adjust once they start moving in one direction.
One area that makes sense over an investment horizon greater than a decade consists of stocks that pay a good dividend yield. There are plenty of stocks that exceed the yield of the 10-year Treasury in addition to the possibility of capital appreciation. One area that most investors overlook is that of preferred shares. Preferred shares offer a higher dividend yield than common shares and carry some preferential treatment. Because they don’t trade as often, many investors aren’t aware of them. One easy way to get a diversified portfolio is through an exchange-traded fund (ETF) like the iShares S&P U.S. Preferred Stock Index Fund (NYSE/PFF).
Chart courtesy of www.StockCharts.com
This ETF has a dividend yield of over six percent and has over 250 holdings of preferred shares. With one share, you get exposure to a very diverse set of businesses with an expense ratio of just 0.48%, a small cost for such a huge collection of companies. With this ETF offering over three times the dividend yield that one could get from the 10-year Treasury and possible price appreciation, it would make sense to look at such a product for one’s portfolio.
While I’m not recommending buying this ETF right now, I prefer to wait and buy on dips in preferred shares. Since they don’t trade that often, any large seller will push prices down temporarily, allowing the quick investor to accumulate preferred shares at lower prices, which also offers them a higher dividend yield. If you notice the circles on the chart, these were short-term sell-offs that allowed the fast trader opportune entries. Of course, over the length of a decade, many things could change and, if the 10-year Treasury note sells off and rates go up, then this ETF will also go down. But, if one were to wait patiently for good opportunities, having a dividend yield of over six percent for the next decade sounds like a better bet than the 10-year Treasury note to me.