Dividends or interest? Incentive debenture rates exceed short-term earnings, study says

For investors interested in passive income strategies, which is more worthwhile at the moment: buying shares of companies with an eye on dividend distribution or investing in corporate debt securities that offer interest with periodic payments?

A survey by Bradesco BBI highlights that in times of crisis and stress in the market, such as the current ones, the profitability offered in incentivized debentures – exempt from income tax – linked to the IPCA (Extended Consumer Price Index) issued by companies exceeds the return in dividends with shares of the same companies – both in the short and in the medium term.

The mismatch between the yield on credit assets and the dividend yield (rate of return with dividends) is temporary, but represents an entry opportunity for the investor who likes fixed income securities.

“We understand that the difference between the accumulated profitability of the debentures and the dividend yield it is greater in times of crisis, given the drop in profitability of companies and the stress in the credit market”, highlight analysts Altair Pereira, André Sonnervig and Caio Lombardi in a report. “That gap tends to end with the reduction of inflation, the normalization of economic activity and the increase in the profitability of companies”.

To reach this conclusion, the study compared the remuneration of incentivized debentures and the return with dividends distributed by seven electric power companies and one sanitation company, segments recognized for their resilient revenues and highly sought after by investors focused on passive income. It is worth remembering that, like the income from the incentivized debentures, dividends are also exempt from Income Tax.

The survey selected companies that had at least one incentivized debenture issued, remunerating the investor with a fixed interest rate plus the variation of the IPCA and with maturities after December 2024. The implicit IPCA of three years, of 7, was used in the account. two%. At the other end, Bradesco BBI designed the dividend yield of the shares of these companies for the years 2022, 2023 and 2024.

Considering inflation, the rise in the real and nominal interest rate curves, the fall in the spread (difference between the cost of raising funds and the remuneration obtained by the investor) and the estimated dividends, the study points out that whoever invested in incentivized debentures of the companies considered and maintained the application until December 2024 would obtain a return greater than the provided by dividends distributed in the same period. The yield used for the debentures was based on the interest curve of the bonds taken to maturity.

An incentivized debenture from Taesa, for example, with an indicative rate of 6.3% per year, would yield 41.2% until December 2024, already considering the implied inflation of 7.2% for the period. Another paper from the same company, with an indicative rate of 5.2% per year, would add up to a return of 37.1% in the same time window. In contrast, the dividend yield of Taesa shares (TAEE11) accumulated for the period would be 22.8%, lower than the yield on the debentures.

Among the companies considered in the survey, only in the case of CPFL energia (CPFE3) the shareholder would have a higher return than the debenture holder, although the difference is minimal: 39.6% of dividend yield against 39% interest on incentivized debentures.

Check below the comparison between the shares of the eight companies:

Is it more worthwhile to be a debenture holder than a shareholder?

For the experts consulted by the InfoMoney, rising interest rates, strong inflationary pressure in Brazil and worldwide, in addition to the fiscal risk and uncertainty generated by this year’s elections, make the profitability of incentivized debentures very attractive. However, the effect is short term and should not extend over the long term.

For some investors, it may be more interesting to seek greater profitability from incentivized debentures in relation to the dividend strategy, emphasizes Luciana Ikedo, investment advisor and partner at RV4 Investimentos.

“I imagine that this mismatch should remain in the short term due to a very stressed scenario. I think that if the monetary tightening of the Copom (Monetary Policy Committee) is coming to an end, the curve may close soon and we will no longer observe this gap”, he says.

In order not to run the risk of opting for an asset that loses profitability in the face of the possibility of reversing the trajectory of interest and inflation, Luciana advises investors to always observe the real rate offered – that is, how much the debenture yields above inflation .

She exemplifies that if the security offers IPCA plus 6% per year, what should be taken into account by the investor is exactly the 6% return. “The current rates of incentivized debentures, considering the Income Tax exemption, are very attractive. And they remain attractive if inflation recedes and interest rates fall”, he highlights. For Luciana, a return of IPCA plus 6% per year should be the minimum sought by debenture holders.

Waldemar Junior, an analyst and fixed income specialist at DV Invest, explains that the drop in company dividends in the short and medium term is related to the increase in interest rates, which ends up raising capital costs, putting pressure on companies’ profits and, as a result, , reducing earnings.

However, he points out that stress scenarios do not last forever and when the Selic goes down, inflation starts to fall and the fiscal balance improves, companies should return to reporting better results, with higher profits and dividends. “The movement of high interest rates on debentures will not extend over the long term and should be used today”, he points out.

In the long run, stocks can stand out

For the long term, looking mainly at energy and sanitation companies, Sergio Biz, an analyst focused on dividends and a partner at GuiaInvest, points out that investors will always have the opportunity to benefit from both dividends and capital gains – a situation that debenture holders do not have.

According to Biz, it may happen that in certain short time windows and periods of high interest rates, debentures perform better compared to dividends. However, in the long term, the earnings of good companies tend to be increasing and the total return of the shares (dividends and capital gain), higher.

In addition, he mentions that companies in the electricity sector generally have their contracts and concessions adjusted for inflation. In this way, the high cost of capital, due to high interest rates, is relatively mitigated. “On the one hand, it increases the cost of capital. On the other hand, the revenue of these companies also grows”, explains Biz.

For this reason, electric companies that pay dividends are still attractive in high interest scenarios. And when the cycle turns and interest rates are lower, companies should continue with positive performances due to their defensive characteristic, according to the analyst.

“Companies in the electricity and sanitation sector have growing dividends. The investor who buys little by little will get a yield on cost (return on the purchase price of the share) very attractive in the long term, exceeding 20%”, he says.

But there are also the risks of an investment in variable income, which can be much greater than those faced by debenture holders. In an extreme situation, in which the company goes bankrupt, the debenture holders have priority to receive the money, while the shareholder, if there is anything to distribute, is the last to receive.

Luciana Ikedo, from RV4 Investimentos, also mentions the predictability of income. In debentures, the yield is already known by the investor at the time of purchase – despite the IPCA being variable, the interest is fixed. In stocks, on the other hand, dividends are always estimated and payments depend on the company’s policy and timing.

Pros and cons of debentures

For those who are thinking of taking advantage of the debentures’ window of opportunity in the short term, there are some points that should be observed, according to experts.

Luciana Ikedo highlights the rating (credit grade) of the issuer, which should preferably be AAA (the highest) or close to it. She mentions that the investor must also observe the duration (duration of investment or average term in which the investor will receive the capital invested and interest) and the liquidity of the securities, which is important if you need to sell them before maturity.

Luciana also explains that due to a recent regulatory change, as of January 2023, debentures will have their yield marked to market, and no longer on the yield curve, as used in the study by Bradesco BBI.

If the investor who bought a security with IPCA remuneration plus 6% per year observed this remuneration daily in his account, next year he will have the price of the security accounted for according to the value negotiated in the market each day. “In this case, there may be a premium or discount on the fees. For those who intend to take the assets to maturity, nothing changes, but for those who did not follow the changes in the yield curve, it will be great news”, says Luciana. The change should add volatility to the debentures.

Thinking specifically about the electricity sector, Luciana reinforces that depending on the segment in which it operates – generation, transmission or distribution – debentures can also offer higher premiums, considering the risk. A distribution company, more exposed to default, may eventually offer higher interest rates on debentures than a transmission company.

Among the risks of investing in debentures, Waldemar Junior, from DV Invest, cites the lack of protection by the FGC (Credit Guarantee Fund), which would end up justifying the higher returns compared to bank securities that have this “insurance”.

To ensure that the resource is not lost, in case the company is unable to honor its commitments, it is essential to observe the guarantees offered, which can be physical assets that the company has to settle debts in times of difficulty. Some experts have reservations that companies with a high risk rating do not usually offer guarantees. Therefore, it is best to balance risk and return.

Waldemar Junior also highlights the covenants – contractual commitments to protect the interest of creditors – widely used by companies that issue debentures in the energy and sanitation sector. “It is a strategy that the company presents to the debenture holder, that it will pursue this goal without having to take financial risk and not having to settle its obligations in advance”, highlights the analyst.

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