There were several reasons he preferred the venerable phone company’s stock to its bonds. One factor was that the stock yielded about 7.0% while the bonds yielded just over 4.0%.
Another factor was liquidity. The time it might require for a multibillion-dollar bond fund to exit a major fixed-income position could take several days. Dumping a similar size stock position could be achieved in a few hours.
It goes without saying that yield is never a primary reason to buy a stock. But Fuss notes some companies combine good yields with sound fundamentals. Those include some biopharma giants like Johnson & Johnson, Merck and Pfizer. Johnson & Johnson's dividend is about 2.5%, Merck's is 3.5% and Pfizer's stands near 4.5%.
“In some cases, the stock is a lot more attractive than the debt,” Fuss says. After the financial crisis, a smorgasbord of companies ranging from Clorox to Microsoft had bonds selling at similar yields to their stocks' dividends. That was before a decade-long bull market.
Nonetheless, the calculations involved in stocks are very different than fixed-income securities. With a bond, the decision involves determining a company’s ability to service and pay back its debt.
Analyzing a stock involves evaluating more variables. “In some cases, the stock is a lot more attractive than the debt,” Fuss said. But when it comes to buying stocks, “I have a very strong bias towards a strong balance sheet, good market share and good growth prospects.”
But over the long term, the dividend can compound dramatically. Bonds just don’t do that.