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By Jeremy Glaser | 08-17-2010 03:10 PM

Don't Invest With the Rearview Mirror

Bonds may have done well over the last decade but dividend paying stocks like J&J may be the best bet for the next ten years says Morningstar's Josh Peters.

Jeremy Glaser: For, I'm Jeremy Glaser. I'm here today with Morningstar DividendInvestor Editor, Josh Peters, who recently saw an interesting bond issue from Johnson & Johnson.

Josh, thanks for joining me today.

Josh Peters: Happy to be here. Not often that I come on and talk about bonds, but this is a little different bond.

Glaser: No. I think, this might be a first for Dividend Investing. What did you find so interesting about this particular J&J issuance?

Peters: Well, one is the interest rate, just 2.95%, and this is a 10-year bond. This is a 10-year relationship with this company, where you're guaranteed that you will not earn more than 2.95% a year if you hold this bond to maturity. That's a little bit of a premium to where a 10-year treasury bond is – I mean, Johnson & Johnson is not quite the U.S. government, but still a pretty narrow spread and a very low nominal interest rate.

What makes it even more interesting is to compare it to Johnson & Johnson's common stock. On the day that this bond was priced, the common stock closed with a yield of 3.69%. So there just by moving from this bond to the stock you pick up yield that is a very rare type of relationship, and these kind of situations are only now really starting to crop out with interest rates so low.

Glaser: Why do you think that's happening then?

Peters: I think it's really coming down to people just becoming determined to own bonds for the sake that they're bonds. And I can understand and I'm certainly sympathetic with the fact that stocks have performed very poorly in the aggregate at the market as a whole over the last decade. They haven't provided the kind of returns that people have been expecting as they try to save for retirement. They've been volatile. A lot of stocks have lost value over the last 10 years.

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