6 Stocks With Dividends Beating Bond Yields

BOSTON (TheStreet) -- Fixed-income investors may find it hard to justify holding corporate bonds when dividend yields of the same companies offer a higher rate of return for at least the next five years.

Corporate bond yields have fallen to the lowest levels in more than a generation. According to monthly information collected by the Federal Reserve dating to 1919, AAA corporate bonds fell to 4.72% in July, the lowest since December 1965. The high was in September 1981, when the rate was 15.49%.

Keith Goddard, president of Capital Advisors Growth Fund(CIAOX), says his clients are looking for an alternative investment strategy as bonds that used to pay a 4% yield are down to 1.5%. He recommends investors with 40% of their portfolio in bonds move to 30% and put the difference in high-dividend-yielding stocks.

If an investor is willing to own a bond for five years, he should weigh the pros and cons of a basket of high-quality stocks that may deliver an attractive dividend yield.

"It's a good idea for part of somebody's fixed income," Goddard says. "It's simply a risk/reward calculation: What is more likely to deliver a better outcome over five years? When you're starting at a 1.5% to 2.5% forecast rate of return in the bond market, it doesn't take much to beat that."

The trick, Goddard says, is to select from a smaller subset of higher-yielding blue-chip stocks. One qualifier is to find stocks that trade at 10 times earnings or less, then pick those that can increase earnings at the same rate of inflation.

Only extremely risk-averse individual investors ought to consider buying long-term bonds that pay less than 3%, says Robert Pavlik, chief market strategist at Banyan Partners.

"I don't understand why people are going into these long-term corporates with these extremely low yields. I don't get it. I really don't," Pavlik says. "I don't even understand why people are going into a 10-year Treasury for 2.70%, either. The stock market is paying more as far as a yield is concerned relative to U.S. Treasuries."

Investors take on more risk when investing in stocks rather than bonds. A company could cut its dividend in hard times -- as even General Electric(GE) famously did last year -- or may find itself in the position where it can't pay the dividend at all. But Pavlik notes that there are many companies that are cash cows, and they continue to reward investors by returning money in the form of dividends.

Capital Advisors Growth Fund's Goddard offers up a basket of six stocks whose dividends may be more appealing to fixed-income investors. Read on to see a list TheStreet has compiled, ranked by current dividend yield.