Dial up dividends in telecom stocks

By Jim Jubak

The Federal Reserve -- with a big helping hand from the global financial crisis and the central banks of much of the rest of the developed world -- has turned income investing upside down.

The Fed's near 0% short-term interest-rate target has sent short-term yields for savers and investors plunging toward, you guessed it, 0%. If you scout around, you can find market accounts offering 1% or 1.3% tops, but 0.3% or 0.4% is more common. And even that beats the 0.13% yield on three-month Treasury bills as of Oct. 12.

Yields on corporate bonds aren't much better. Yields on investment-grade U.S. corporate debt fell to a record low 3.56% in the first week of October, according to data from Bank of America.

And now the Fed is making noises -- loud noises -- about doing the same for long-term interest rates. Yes, the Fed is considering a new round of quantitative easing -- a term that doesn't have anywhere near the shock value of saying, "Yes, we're thinking about buying another $1 trillion or so in Treasury bonds on credit" -- to drive long-term rates lower.

Lower? A two-year Treasury note already yields just 0.37%. Go out to 10 years and you can get 2.46% on a Treasury. Got 30 years? 3.84%. (Good luck with inflation over three decades.)

That has made this a completely confusing time for income investors.

In search of higher yield

Investors are looking in every nook and cranny -- some of them very unfamiliar and some downright puzzling -- to find any extra yield.

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So in May, when Microsoft (MSFT, news, msgs), a company with $40 billion in cash on its balance sheet at the time, moved to sell bonds, investors snapped them up. And why not? The company sold $2 billion of five-year notes yielding 2.95% and $1 billion of 10-year debt yielding 4.2%. Five- and 10-year Treasurys currently yield 1.13% and 2.46%, respectively. (Microsoft is the publisher of MSN Money.)

The reasons that investors have snapped up some other recent debt deals are a little less obvious. In early October, Mexico sold $1 billion in 100-year bonds. Now, insurance companies and pension funds have a need for long-dated debt so they can match future liabilities with the assets that will pay for them, so I can understand why this deal might have sold. But I don't, frankly, understand the pricing on this debt. The yield on these 100-year bonds was just 5.8%. Mexican bonds that mature in 2024 yield 6.26%. Give up 0.46 percentage point and take on an extra 86 years of risk? Seems a bit steep just to match liabilities and assets.

But one of the most striking developments in the world of income investing is taking place in a much more familiar sector: telephone stocks. From June 30 to Oct. 13, shares of Verizon Communications (VZ, news, msgs) rose 23%. The Standard & Poor's 500 Index ($INX) hasn't been standing still, but Verizon shares leave the index in the dust. The S&P 500 has gained just 14% in that time. You don't have to look very hard to find a reason for the outperformance. Verizon shares pay a huge (for today, anyway) 6.05% dividend yield.

Continued: Treasury or corporate bond?

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