Chances are, if you’re reading this blog, you’re not a million years old. It’s a rule that people over 50 don’t actually know how to use the internet, except for filling up their computer with spyware and stupid weather widgets. Every few months, I have to go fix my grandparents’ computer, so I know about this stuff. Don’t you wish sometimes your grandparents/parents/whatever older relative didn’t know about the internet?
Anyway, I’m guessing those people don’t read this blog. It’s a good thing, the jokes would offend them. My demographic mostly consists of people under 40, moderately attractive, with approximately 1.6 children. I know this because I’m secretly watching all of you. At least, it used to be a secret.
Experts say you should have some bonds in your portfolio, in addition to owning stocks. Some say your stock allocation should be, (as a percentage) either 100 or 110 minus your age, depending on which person you listen to. Since I’m almost 30, (editor’s note: damn, I’m old) I should have 70-80% of my portfolio in equities, with 20-30% in bonds. If you count my preferred shares, I’m actually right in the range, totally by accident. See, I’m better by accident than you are on purpose. I suggest sitting in a corner and weeping.
In today’s low interest rate environment, you’re not exactly getting a good return on bonds. A 10 year U.S. government bond is yielding a scant 1.58%. In Canada, the yield is a little better, at 1.76%. Even if you buy the whole Canadian bond index, (which includes high-grade corporate bonds along with ones issued by government) your yield increases to around 3%. Don’t act so excited, those yields suck.
Even if you take a little bit more risk by buying preferred shares or lower quality corporate bonds, you’re not getting much more than a 5% yield. Maybe I’m greedy, or maybe I’m just living in denial, but I cannot get excited about 5% yields. I haven’t bought any fixed income since early 2011, when there were rumblings the U.S. municipal bond market was going to blow up. I bought DMF, in case anyone is wondering, right around the $8.00 mark. The fixed income portion of my portfolio yields around 8% right now.
Combined with the crappy yields is the fact that common stocks have some decent yields right now, thanks to general market weakness and because of investor demand for dividends. You guys know I like the sugar business, and Roger’s Sugar yields 6.25% right now. Investor favorites AT&T, (which yields over 5%) Philip Morris, (smoke ‘em if you’ve got ‘em, 5%) any of the Canadian banks (approximately 5%) or even maker of delicious, delicious potato chips, Pepsico (3% and change yield) pay out dividends much more generous than all but the crappiest of corporate bonds. All of those stocks represent the chance for capital appreciation too, and they’re all rock solid businesses. It’s little wonder why dividend stocks are popular right now.
Dividend stocks are one choice for your fixed income dollars. Here’s the other, which is a little more unorthodox, but hear me out. OH GOD, WHY WON’T YOU HEAR ME OUT? It’s your mortgage.
Think about it. For every dollar of mortgage you pay off, you’re getting an after tax return of 2.5-5%, depending on your mortgage rate. This rate of return is virtually guaranteed, kind of like a basket of high quality bonds. Like bonds, you know what your return is going to be, and you know there isn’t going to be any capital gains, just like bonds, especially these days.
Bonds in general have experienced one hell of a run. Bond yields are at record lows, and investors are rushing towards fixed income (especially government bonds considered to be safe havens – American, Canadian, Swiss, German, etc.) because this European mess is literally scaring the crap out of them. It makes the contrarian inside of me cry that you’d even think about buying an asset class at record highs.
Upon further introspection, that’s actually my fragile feelings making me cry inside. And outside. DON’T LOOK AT ME.
Hell, the entire S&P 500 is yielding more than the U.S. government 10 year bond. That should literally blow your mind.
If you’re near retirement age, bonds are a necessity, even at these inflated rates. You’ve got to suck it up, buy short term debt, and just take your medicine in the form of crappy interest. Preserving capital becomes increasingly important as you get older. If this European mess spreads across the Atlantic like a case of herpes from a dirty, smelly French guy, it could send stock markets over here tumbling. If you’re a young investor, that should make you salivate, but someone close to retirement can’t afford to lose large amounts of capital.
In fact, you could argue this is the perfect opportunity for young investors to borrow money to invest. In Canada, if you borrow against your principle residence, that’s called the Smith Maneuver. I know you’re wondering, and yes, it was totally named after me. I can get a line of credit secured against my house for 3%, and I can easily pick a basket of stocks that’ll spin off enough in dividends alone to cover my interest payments. The capital gains, assuming there are any, would just be gravy. This plan isn’t without risk, but come on, live a little. Wuss.
Anyway, what’s the point of this rambling crap-show? Don’t buy bonds, especially if you’re young. The yields suck, and prices will eventually go down. Or, if you have a mortgage, just pay that down and pretend it’s the fixed income portion of your portfolio. Interest rates will go up eventually, you can start loading up on bonds then.