Wal-Mart Stores, Inc. (WMT), The Coca-Cola Company (KO): Stocks with Bond-like Qualities

American States Water Co (NYSE:AWR) looks like another stock with bond-like qualities and part of the reason for this is the company’s extensive dividend history, which stretches back 58 years. In addition, the payout has grown in line with inflation, a quality that bonds do not necessarily have. American States Water has a higher level of debt than those above but American States is a utility company, and a higher level of debt is expected. Interest costs are covered five times by EBIT and the company has grown net income 89% during the past five years, when many other business have been struggling — highlighting the company’s defensive nature. During the first quarter of this year dividend payouts were covered 4.5 times by net operating cash flow, indicating that the company’s income would have to fall 70% before payouts came under pressure, unlikely as the company’s customers would have to stop drinking water.

Why buy these companies?

Bonds are perfect for risk averse investors but they are also very constrictive. Interest rates on bonds are usually fixed, the debt always redeems at par ruling out any prospect for capital growth and longer duration bonds are highly susceptible to changes in the rate of interest.

Shares with bond-like qualities offer the same kind of security but the potential for both capital growth and dividend payouts that will grow in line with inflation and there is potential for special payouts, which makes these four dividend Goliaths above look much more appealing to the long term investor.

Foolish summary

Bonds are good assets and should form a part of every portfolio. However, these four stocks offer many of the positive aspects of owning a bond — such as reliable payouts and low market risk — without the undesirable effects, such as high sensitivity to interest rate changes and fixed redemption values.

The article Stocks with Bond-like Qualities originally appeared on Fool.com and is written by Rupert Hargreaves.

Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends The Coca-Cola Company (NYSE:KO). Rupert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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