Motley Fool analyst Reuben Gregg Brewer says he would still buy S&P 500 member PepsiCo over the 10-year Treasury note, even though the bond's yield near 4.8% beats the stock's 4.2% dividend yield. He argues fixed Treasury income can't keep pace with inflation, while PepsiCo's dividend has room to grow.
The 10-year Treasury yield is hovering around 4.8%, against PepsiCo's 4.2% dividend yield. Brewer says the roughly 60 basis point gap amounts to roughly 14% more income from the Treasury today. Yet he still favors the stock.
Why the higher Treasury yield isn't the full picture
A Treasury bond pays a fixed interest rate for the life of the loan and returns the principal at maturity. Inflation erodes the buying power of that fixed income and of the principal over time, according to Brewer. He notes inflation is running hot right now, which weighs more heavily on a bond's real return than on a stock tied to a growing business.
PepsiCo's dividend record
PepsiCo, part of the S&P 500, is a Dividend King with more than 50 consecutive annual dividend increases. The stock trades around $136.32. That gives the company a market cap of roughly $186 billion. Brewer says PepsiCo faces near-term headwinds shared by peers, but its history suggests it can realign its product lineup with consumer buying habits.
The trade-off Brewer is weighing
Treasuries are generally considered risk-free because they carry the backing of the U.S. government, while PepsiCo carries the risks of an operating business. Brewer argues that if PepsiCo's business grows again, its dividend increases and share value could rise together, offsetting inflation in a way a fixed-rate bond cannot. He says investors unwilling to take on any risk are still better off in Treasuries.
Source: The Motley Fool
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