Investors building retirement portfolios have many choices. They can consider stocks and bonds, savings accounts, certificates of deposit, real estate investment trusts, an index fund, mutual funds, and many others as they look to build a diversified portfolio using asset allocation. Annuities, whole life, and other insurance company products can add to the mix.
This can get very confusing, especially considering the impact of changing interest rates, the need for guaranteed income, setting up the right retirement account, and what happens in the stock market.
As one reviews and builds sources of income, from Social Security and elsewhere, both short term, long term, and other cash flow impacts on the nest egg need to be considered.
For CDs and especially bonds, maturity dates can be critical and should be scrutinized. As most of the rest of this article will highlight, though, bonds may not be a good choice to keep or buy going forward.
Barron’s recently headlined that “Treasury Bonds Are Now Riskier Than Stocks” in the respected Up and Down Wall Street column (Sept. 6, 2019). It said “the S&P 500 dividend yield is nearly 2%, while the 10-year Treasury yields 1.55%, marking a rare time when stocks yield more than government bonds.”
Looking at stocks with attractive dividends can now be pretty alluring in a world of low interest rates. For instance, the iShares Select Dividend ETF (DVY) , pays nearly 3.5%. Value hounds targeting high payers can do even better if they look for individual stocks, as does Camarda’s Caesar portfolios. For instance, Exxon (which we don’t own to make for an unconflicted example) pays nearly 5%, and many familiar names pay even more, some yielding 6.5% or even more.
Of course, stocks are not without downside risk. Stock investors should be prepared to stay in it for the long haul, since time tends to damp out the volatility and price swings. Longer holding periods are generally safer because of this. But at this point in the cycle, bonds can be at as much if not greater risk of market-crash type conditions, and probably without the upside of stocks.
But with the current economic conditions, building retirement portfolios around strong dividend income can be a good bet, offering not only attractive payouts, but nice appreciation potential as well.
Value stocks – the kind Warren Buffett talks about and invests in, which can be had on the cheap and which often offer nice dividend payments – have gotten really beaten down over the past ten years compared to growth stocks, and even indexes like the SP 500. While there have been some signs of a value turnaround lately, cheap stock investing has fallen so far out of favor many fans have given up or disappeared, which could be a sign of opportunity, since so few have been buying lately. Some pros, Camarda included, feel there’s a lot of great buys lurking in this space. We see some companies we think are really wonderful that still seem to be “on sale.”
Foreign value stocks may offer even more opportunity. They have gone down even more, and many offer attractive dividend yields. Many of these yields are even richer than US rivals.
Besides the higher income stocks may offer, they can potentially provide even more profits for patient investors. Stocks in sound companies can be expected to rise over time, but bonds are generally flatline investments which don’t grow much aside from interest rate effects. The long-term trend for stocks is generally up, for bonds, flat. But for periods of rising rates, the bond trend is down.
We think value stocks offer superb opportunity in the current environment, which is why we are so excited about the potential for Camarda’s Caesar individual stock strategy.