I prefer to generate my income from dividend stocks rather than bonds, and the events of last week aren’t going to change that.
Bond yields have soared in recent days as investors reckon that interest rates will now have to stay higher for longer. Ten-year gilts and 10-year US Treasuries now both yield almost 4.8%, the highest since 2007.
Investors are asking why take the added risk of investing in equities, when they can finally get a decent return from bonds.
I’d choose shares over bonds
I can name three reasons, namely wealth manager M&G (LSE: MNG), housebuilder Taylor Wimpey (LSE: TW) and commodity giant Rio Tinto (LSE: RIO).
All three FTSE 100 stocks are paying me income of more than 8% a year. That’s far more than any government bond I’d consider buying, and they offer superior capital growth prospects too.
M&G actually yields 10.06%. While double-digit yields can be precarious, I think there’s a fair chance this one is sustainable. Last month, it posted first-half adjusted operating profits of £390m, up 31% in a year. Consensus only expected £284m.
The board said it’s on track to meet its operating capital generation target of £2.5bn for 2024, and 2025 looks promising too. M&G has also generated steady share price growth over the last 12 months, rising 15.62% despite recent stock market volatility.
The Taylor Wimpey share price is at the mercy of interest rate expectations. When the Bank of England suggested UK rates had peaked, it soared. When markets started fretting about US Federal Reserve hawkishness, it fell.
Rates rise, this stock falls
Higher interest rates and falling house prices are bad news for Taylor Wimpey. It would hit orders and sale prices, at a time when build costs are still high. Yet the risk seems priced into its valuation of just 6.02 times earnings. Perhaps, surprisingly, its share price is up 23.09% over the last year. It was really oversold before.
The housing market will get worse before it gets better. The same could be said for Taylor Wimpey’s financial performance, with first-half profit before tax falling 29% to £237.7m. However, it has a net cash position of £654.9m. The dividend looks secure although, as ever, there are no guarantees.
Like all FTSE 100 commodity stocks, Rio Tinto has been hit by trouble in China, the world’s biggest consumer of metals and minerals. Its share price is down 1% in the last year. But investors can console themselves with a yield of 8.13%.
Rio’s shares are also really cheap, trading at 7.37 times earnings. The risk is that China’s problems get worse rather than better. Another danger is that the US slips into recession, further squeezing demand.
The board halved its dividend earlier this year, so it cannot be relied upon. Nevertheless, I would still bank on it to deliver superior total return from income and growth than government bonds over the longer run.
At some point markets will kick on, and these three shares will feel the benefit. If the shares fall in the interim, I’ll buy more of them at the lower price.
