dividend stocks vs. bonds

[captainspoke]

In a different thread I confessed--as a retiree--to not having any bond allocation, and gave some percentages for my portfolio. There, I said that besides cash, I had about 18% in dividend stocks, and quite a lot more in equities. Also, someone pointed out (and I'm paraphrasing) that with a large enough cash allocation, that that was an 'okay' way to go about it.

The other day I came across this article, which seemed to ring some mental bells, perhaps adding another way that dividend stocks can be viewed within a portfolio. Reading thru it, I found myself agreeing with different things, having a thought or two like, 'yeah, that's kind of what I was thinking'. Here it is:

https://www.simplysafedividends.com/int ... retirement

In that other thread, I didn't offer the rationale that the dividend stocks were being substituted for bonds, but after reading this, I think there's something to that perspective. (perhaps some confirmation bias? )

What do you think of the various points in the article?

[Kanto]

Dividend investing has no inherent advantages vs growth advantages. Dividends can be stopped at any time (2020 has lots of examples). They do have a convenience factor for those that do not wont to bother selling 2-3% of their portfolio a year as is standard with non-dividend retirement budgeting.

They do not really compare with bonds holdings, assuming you are talking about developed country government bonds, (Canada, U.S etc) which are inversely correlated with equities. These typically act as a ballast in a portfolio, a more secure holding that offers some income and allows you to rebound from a downturn in the equities market.

In North America CD and GICs offer more attractive alternatives to bonds and their meagre yields, but not so in Japan.

Corporate bonds are not inversely correlated with equities. So investing in corporate bonds may cause you to overweight a single sector and prevent proper diversification.

[Kanto]

I thought the discussion was about how to generate income not how to hedge equity with bond so I think corporate bonds can be part of a generating income portfolio. But agreed if you want income with lower risk then need to chose well the credit profile.

One way to mitigate risk of discontinued dividend is to choose REITS which by law have to distribute a portion of income and gains.

If someone's focus is only on generating income, and not on mitigating risk, they would have 0% government bonds in their portfolio.

...

REITs offer more risk, for less upside in my opinion. They are taxed disadvantageously usually and are not very diversified. A Global stock index like Vanguard VT already has about 3% exposure to REITs, and that is enough for me.

[TokyoWart]

In a different thread I confessed--as a retiree--to not having any bond allocation, and gave some percentages for my portfolio. There, I said that besides cash, I had about 18% in dividend stocks, and quite a lot more in equities. Also, someone pointed out (and I'm paraphrasing) that with a large enough cash allocation, that that was an 'okay' way to go about it.

The other day I came across this article, which seemed to ring some mental bells, perhaps adding another way that dividend stocks can be viewed within a portfolio. Reading thru it, I found myself agreeing with different things, having a thought or two like, 'yeah, that's kind of what I was thinking'. Here it is:

https://www.simplysafedividends.com/int ... retirement

In that other thread, I didn't offer the rationale that the dividend stocks were being substituted for bonds, but after reading this, I think there's something to that perspective. (perhaps some confirmation bias? )

What do you think of the various points in the article?

I am kind of biased against bonds so I'm also subject to confirmation bias when reading that link. Interesting to be reminded that when it was written (early 2018?) the 10 year US Treasury still yielded almost 3%!

I think the point that dividend stock portfolios now often deliver more income than bonds is true in many but not all cases. They might have mentioned that stock dividends (although I agree they can be cut) also rise over time as a group. Let's take BND as a summary of US bond coupon rates because it covers not only government bonds but also corporates and compare the dividend yield to some broad stock index ETF's:

BND 2.4%
(Total US stock market) VTI 1.63%
(S&P 500) VOO 1.66%
(high dividend yield US stocks) VYM 3.53%
(Total world stocks) VT 1.95%
(Emerging markets) VWO 2.95%
(Ex-US World stocks) VEU 2.47%
(Ex-US world stocks) VXUS 2.4%

So BND still beats the US stock market for dividends but already loses to index funds which are solely ex-US and it badly loses to almost any high dividend yield stock fund. That comparison would look even worse if you used a safe government bond fund (even a longterm fund like VGLT is only 1.95%).

On the other hand stock dividend funds don't really protect against market volatility the way bonds do (a large cash buffer like you have can make that less of an issue if you don't mind the psychological hit of seeing the volatility) and I think it's a mistake to reach for dividend yield instead of considering the portfolio as a whole and taking capital gains as needed to maintain the sustainable withdrawal rate (instead of skewing the portfolio to what might be lower quality equities which happen to pay high dividends).

[RetireJapan]

If you listen to the podcast with Burton Malkiel from this week's Monday Read, he suggests using blue chip dividend paying stocks instead of bonds in the current low yield environment. It's a pretty interesting conversation: https://awealthofcommonsense.com/2020/1 ... n-malkiel/

[TokyoWart]

If you listen to the podcast with Burton Malkiel from this week's Monday Read, he suggests using blue chip dividend paying stocks instead of bonds in the current low yield environment. It's a pretty interesting conversation: https://awealthofcommonsense.com/2020/1 ... n-malkiel/

Malkiel made similar comments in his interview with Morningstar

https://youtu.be/mO99E4KWj1k

[Kanto]

If you listen to the podcast with Burton Malkiel from this week's Monday Read, he suggests using blue chip dividend paying stocks instead of bonds in the current low yield environment. It's a pretty interesting conversation: https://awealthofcommonsense.com/2020/1 ... n-malkiel/

I will have to listen to this later, however, doesn`t that approach fail the logic test?

Government bonds are inversely correlated with equities, bluechip stocks are not

They do not offer diversification or ballast. This recommendation could only be suitable for those already retired, stuck with static bonds paying out little.

[fools_gold]

I will have to listen to this later, however, doesn`t that approach fail the logic test?

Government bonds are inversely correlated with equities, bluechip stocks are not

They do not offer diversification or ballast. This recommendation could only be suitable for those already retired, stuck with static bonds paying out little.

The problem is that low interest rates have left people scrabbling around for something that is low risk and offers better returns than bonds. Unfortunately there isn't anything. So, you're left with the choice of accepting lower returns or taking on more risk.

[captainspoke]

To start, thanks to Ben for the link to the Monday Read with some more discussion about this—and I haven’t listened thru that yet, nor the morningstar interview. Maybe the following did get some attention there, so if that’s the case, sorry for being repetitive (and for probably expressing things less well than a pro).

But there are two things* I’ll try to add now. First, in the dividend stock-vs-bond discussion, it seems that things are looked at as a snapshot—here at the div stocks, and here are the bonds, and this is the way they are. Another aspect is what might happen to them long term. To illustrate, let me cherrypick one my my holdings, MO/Altria. I’m sure this effect is well-known, but here it is anyway.

I bought MO in late in 2009, and my basis is $19.24. These are the dividends paid (skipping 2009).
2010: 1.46
2011: 1.58
2012: 1.70
2013: 1.84
2014: 2.00
2015: 2.17
2016: 2.35
2017: 2.54
2018: 3.00
2019: 3.28
2020: 2.54 (so far, includes .86 due to be paid on Oct 9th)

• Those payments totaled = $24.46, so (A) it has more than paid for itself.
• And (B), its ongoing yield on my cost basis is ~17%. ((yield at present is ~8.8%))
• Further (C), shares are now at 39.50, about twice my cost, so some unrealized gain there. ((and yes, I am very aware that it was trading over $70 a few years ago…!))
• CFRA gives MO a beta of 0.50 while yahoo finance tags it at 0.55.

So, while cherrypicked, I’ll cap this first point with a question: Are there bonds of any category that do something like that?



(*sorry, other stuff to do, so I’ll try to get to a second point later)

[Kanto]

I will have to listen to this later, however, doesn`t that approach fail the logic test?

Government bonds are inversely correlated with equities, bluechip stocks are not

They do not offer diversification or ballast. This recommendation could only be suitable for those already retired, stuck with static bonds paying out little.

The problem is that low interest rates have left people scrabbling around for something that is low risk and offers better returns than bonds. Unfortunately there isn't anything. So, you're left with the choice of accepting lower returns or taking on more risk.

This still seems shortsighted. If the bottom of the market falls out, a retiree who is heavily invested in equities would be in a seriously poor state without the bonds to cushion the blow and help them rebalance.

Bond yields have been low for some time. It is terrifying to imagine someone being in a situation where they are dependent on bond yields or coupons for survival.

Better to have a mix of Bonds and stocks, and sell down the stock 2-3% a year and live off that income.