A recent article on this site focused on how stocks are better than bonds. That is particularly true for municipal bonds, the debt issued by cities and other areas. The terrible financial shape many American cities makes dividend stocks such as ConEd (NYSE: ED), PepsiCo (NYSE: PEP), and Illinois Tool Works (NYSE: ITW) very attractive.
Detroit has filed for bankruptcy.
It does not appear as if Chicago is very far behind. The bonds of Chicago were recently downgraded, according to a recent article in The Wall Street Journal. There are many other American cities in woeful financial condition.
That cannot be said about publicly traded companies such as ConEd, PepsiCo, and Illinois Tool Works. Each of these blue chips has come out of The Great Recession doing very well. This is seen by the performance of each in 2013: PepsiCo is up more than 24% for the year, with Illinois Tool Works rising more than 40%.
The dividend yields of these are equally alluring.
Consolidated Edison has a dividend yield of 4.45%. For PepsiCo, it is 2.75%. Illinois Tool Works has a dividend yield of just over 2%. All of those dividend yields top the average of about 1.9% for a member of the Standard & Poor’s 500 Index.
The dividend yields are also higher than those for many municipal bonds.
So is the future. American cities are loaded up with pension and health care costs that the tax base cannot sustain. The actions taken by political leaders have fallen far short. That is demonstrated by the bankruptcy of Detroit and the terrible financial shape of other cities. As an example, Chicago has a $600 million pension payment to make that it is difficult to see it being made.
By contrast, the dividends will be paid and increased by ConEd, PepsiCo, and Illinois Tool Works as is the history of these companies.