Year-later update: TIPS versus booze, which is the better investment?

Last October, after a wonderful trip to Ireland and visits to Diageo’s Bushmills (whiskey, in northern Ireland)  and Guiness (beer, in Ireland) facilities, I had a thought: “Better long-term investment: 30-year TIPS or … booze?”

What was interesting at the time was how similarly the stock prices of Diageo plc (ticker DEO) and the TIPS ETF (ticker TIP) had performed over the previous five years. Here was the 5-year chart as of Oct. 15,2012:

DEO versus TIP

The TIP ETF, shown in blue, was up about 20% from 2007 to 2012, slightly trailing the performance of Diageo, shown in red. But Diageo was much more volatile.

In the posting, I noted that both Treasurys and Diageo were fully priced after strong runs. I speculated that an investment in a 30-year TIPS would beat Diageo for safety, but Diageo’s dividend and earnings growth meant it it would probably outperform a 30-year TIPS, which at the time was yielding just 0.38% above inflation.

So what has happened in the year since I wrote this? Here you go:

TIPS versus Diageo

Since Oct. 15, 2012:

  • TIPS yields have risen dramatically, with the 30-year reissue scheduled for Oct. 24 likely to draw a yield of about 1.38% , a 100-basis point increase.
  • The TIP ETF closed Thursday at $112.65, down 6.6% from the $120.61 close on Oct. 15, 2012. This negative number comes even after a recent run-up in TIPS prices.
  • Diageo closed Thursday at $125.89, up 13.1% from the $111.30 close on Oct. 15, 2012. This positive number – nearly 20% better performance – comes despite a recent dip in Diageo’s stock price.

What does it mean? Nothing really. Stock prices and Treasurys have benefited from Federal Reserve stimulus. But if the bond-buying stimulus tapers away or ends, TIPS and Treasurys will see yields rise and prices fall.

Booze won’t be much affected. People will still drink.

Advertisements
This entry was posted in Investing in TIPS. Bookmark the permalink.

3 Responses to Year-later update: TIPS versus booze, which is the better investment?

  1. Joe Keenan says:

    I notice information on the Treasury Direct website information on a new floating rate product. I assume this is available for taxable products and not tips products. How will the floating rate product measure up to the tips products considering that interest rates should rise in high inflation environments? Thanks. Joe Keenan

  2. tipswatch says:

    Joe, thanks for the heads up on the new information on TreasuryDirect. I know little about the floating rate notes but I am very curious. The first auction is coming up in January. I believe they will have a 2-year term (versus 0.33% currently for a two year) but they will have a floating rate tied to the 3-month (currently 0.03%). So obviously these are going to seriously lag inflation.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s