One trade I am considering is shorting the 10 year Treasury and using the proceeds to invest in high quality, high quality, high dividend paying stocks. I haven't done it yet, but the idea is to short an amount of Treasuries then go long 60%-75% of that amount in stocks. I was thinking of shorting $100k in Treasuries and going long $70k in stocks.
High yielding US stocks I currently own are JNJ and CAG. I also own MET, which I expect to hike it's dividend soon. Other potential stocks include CPB, GE, HNZ, JPM, K, KMB and PG. I would also throw UL into that mix too. I am a buyer when the dividend yield hits 4%, which is generally 6%-10% down from here.
Such a trade would generate a positive carry of about 1%, i.e. if you pay the Treasury yield of 1.45% and receive the dividends from the stocks, your net return is ~$1000.
The risk, of course, is a negative move in stocks and a positive move in bonds. If the yield on the 10Y falls to 0.1%, the bond price rises 12%. If it falls to -0.5%, it rises 25%. The stocks listed above are low beta stocks that are unlikely to fall more than 20%-30% in the event of a cataclysm. What does give me pause, however, is that in 1973-74, stock PEs were lower than their concurrent dividend yields. Anything can happen in financial markets, so one must prepare for all possibilities, no matter how remote.
