This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Lesson from Detroit: Buy Dividend Aristocrats, Not Muni Bonds

Stocks in this article: WMTKOXOMC

NEW YORK ( TheStreet) -- One lesson from the Detroit bankruptcy is that anything a municipal bond can do, a stock can do much better, especially for those seeking income from their investments.

So-called "Dividend Aristocrat" stocks such as Coca-Cola  (KO), Exxon Mobil (XOM) and Wal-Mart (WMT) should outperform municipal bonds over the long term.

A Dividend Aristocrat stock refers to the stock of a company that has increased its dividend annually for at least the past 25 years. These stocks often have higher-than-average dividend yields. While the average dividend yield for a member of the Standard & Poor's 500 Index is 1.9%, Coca-Cola's dividend yield is 2.8%. Exxon Mobil's 2.6% and Wal-Mart's 2.4%.

What is virtually guaranteed for these dividends is that the amount will increase annually, as it has for more than a quarter of a century.

There is nothing comparable in the world of municipals bonds. Stephen Moore, a member of The Wall Street Journal editorial advisory board, wrote an article in August 2013 for Newsmax about the top 20 American cities in danger of bankruptcy. The list included cities most likely to follow Detroit into Chapter 9 bankruptcy.

Those owning those municipal bonds will be lucky to get the par value of the bonds, least of all the contracted interest rate; and certainly not any increases in the yield.

The cities include major players in urban America. According to Moore, Oakland, Providence and the school district of Philadelphia are teetering on the brink of insolvency, mainly because of pension and health-care costs. Chicago, Cincinnati, Minneapolis, Sante Fe, and Portland, Oregon are all under a Moody's review. The threat of bankruptcy looms for Los Angeles, too. Even the state of Illinois is looking at " Going Bankrupt," according to an article in Time.

When a publicly traded company increases its dividend annually for over two decades, bankruptcy isn't a concern.

Paying a dividend is a sign of strength as a company's board decides it is in the best interest of the business to share earnings with all of the owners, no matter how thin the slice of equity.

To increase a dividend annually for a quarter of a century is remarkable considering that the past 25 years have included the Great Recession, two other recessions, a housing bubble, a tech bubble, wars and an terrorist attack on the United States.

If the tax-free income of a municipal bond is alluring, then simply buy the Dividend Aristocrat stock for a tax-protected account such as an individual retirement account or 401(k) and receive the same benefit.

Writing in the Financial Times, Meredith Whitney, the analyst who called the problems at Citigroup   (C) before the onslaught of the Great Recession, stated that, " The aftershocks of the largest municipal bankruptcy in US history will be staggering, and Detroit will set important precedents."

The recent court ruling allowing the Chapter 9 filing will most likely be challenged, but it is likely to be upheld. For municipal bond owners, the truly pernicious aspect of the Detroit bankruptcy is that a road map has now been provided for others in how to default.

By contrast, shareholders of Dividend Aristocrat stocks can look forward to their dividend income growing annually as it has for decades. Small wonder that Warren Buffett is a major shareholder of Coca-Cola, Exxon Mobil, and Wal-Mart. Those owning bonds from Detroit and other U.S. cities are surely wishing they were, too.

At the time of publication, the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Yates is a financial writer who has had thousands of articles appear in periodicals and Web sites such as TheStreet, Newsweek, The Washington Post and many others. Much of his career was spent working on Capitol Hill for Members of Congress in both the House and Senate, on both committee and personal staff.  He was also General Counsel for a publicly traded corporation.  He has degrees from Harvard University, Georgetown University Law Center and The Johns Hopkins University.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,614.81 +215.14 1.31%
S&P 500 1,941.28 +37.27 1.96%
NASDAQ 4,419.4780 +103.4040 2.40%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs