High Dividend Stocks as bond substitute?

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triyoda
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High Dividend Stocks as bond substitute?

Post by triyoda » Fri Jan 19, 2018 12:07 am

First, I find this forum very useful, lots of good information here. I feel like I am ready to drink the proverbial coolaid and commit to an asset allocation model portfolio. In principal I would like to go 70/30 stocks bonds, but I am really concerned about macro issues that surround bonds.

1. From what I read and think I understand, we are at or near the end of a prolongued (35 year) bond bull market. I wish it was 1984, a recent article (I think in Barron's) indicated in 1984 you could get a 30 year Treasury yielding 14%, when inflation was only at 4% (10% real return). What a great investment that would have been.

2. In any case, it seems like from the "bottom" of a bond bull market, it actually continues to get worse before it gets better. Short term bond funds are only going to return about 1-2% in the next few years. Any bonds longer than 1-2 years are going to drop in price as rates rise. So, if I look ahead and say what is the best case scenario for bonds over the next 2-3 year. Best case is I get a 2% return on a broad market bond portfolio allocation. It seems like until rates for 5 year treasuries hit 4%, the best strategy is to just stay out unless you thought the stock market was very risky.

3. I am very committed to dividend stocks and have invested in a lot of drips. I am trying to wean myself off this, get less exposure to individual stocks and more into an asset allocation using index funds.

4. For 2017, my drips with my computershare account returned 22.3% including a 3.8% yield (portfolio of Verizon, Phillip Morris, Altria, Abbot Labs and Abbvie). I had built this lineup based on being lower risk, higher yield. It helped that Abbot and Abbvie had a really good year, just lucky I guess.

5. For some reason I like telecons and currently hold Vodaphone (5.2% yield), Verizon (4.5% yield) and Deutsch Telecom (3.84% yield) and I feel like it would be lower risk (at least over the next two years) to be only 10-15% in bonds and substitute some selected high dividend stocks like the telecoms. I feel like the cellphone rate wars are mostly over and telecoms should be quite stable and the dividends are very safe.

Overall, based on where the bond market is and because I expect it will change gradually I can't convince myself to commit to a full bondd asset allocation. Talk me into the asset allocation.

onourway
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Re: High Dividend Stocks as bond substitute?

Post by onourway » Fri Jan 19, 2018 6:38 am

Everyone feels like dividends are safe...until they aren't.

In the context of deciding your asset allocation, bonds role is to control risk, not provide yield. Viewed that way, high dividend stocks are wholly inappropriate for that purpose.

This chart compares Vanguard's High Dividend Yield fund compared to Total Bond over the period 2007-2012. Note that High Dividend Yield performed rather identically to the Total Stock Market (in green).

Image

livesoft
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Re: High Dividend Stocks as bond substitute?

Post by livesoft » Fri Jan 19, 2018 7:35 am

So your stocks had the return of the stock market which you could've gotten with investing in a couple of total stock market index funds. They are not bonds nor bond funds and should not be compared to bonds.

If you want 100% equities and the risk that goes with that, then it is not a problem I think.
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Toons
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Re: High Dividend Stocks as bond substitute?

Post by Toons » Fri Jan 19, 2018 7:40 am

"Talk me into the asset allocation"
Not trying to be "snarky' here.
Regarding YOUR finances
I think that once YOU know what YOU want to do in this decision making process and are comforatable with it,
then it is the right decision FOR YOU.
Listen to Others but
Make Up Your Own Mind.
Confidence,breeds
Confidence.

:happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

Grt2bOutdoors
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Re: High Dividend Stocks as bond substitute?

Post by Grt2bOutdoors » Fri Jan 19, 2018 7:42 am

Equities are not bonds, nor are they a substitute.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

OldSport
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Re: High Dividend Stocks as bond substitute?

Post by OldSport » Fri Jan 19, 2018 7:56 am

Grt2bOutdoors wrote:
Fri Jan 19, 2018 7:42 am
Equities are not bonds, nor are they a substitute.
Agree but the OP does have a point with being at end of a secular bond bull market. Bond rates should rise in the next few years.

Equities are not a bond substitute, but what about 20% minimum volatility fund and 80% short term investment grade as a bond substitute? That is not particularly tax efficient but could work in a tax sheltered account.

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Re: High Dividend Stocks as bond substitute?

Post by bgf » Fri Jan 19, 2018 8:15 am

triyoda wrote:
Fri Jan 19, 2018 12:07 am
4. For 2017, my drips with my computershare account returned 22.3% including a 3.8% yield (portfolio of Verizon, Phillip Morris, Altria, Abbot Labs and Abbvie). I had built this lineup based on being lower risk, higher yield. It helped that Abbot and Abbvie had a really good year, just lucky I guess.
my portfolio, which includes around a 5% cash/bond drag plus all transaction costs and retirement account fees and expenses, returned 22.9% last year. it is basically just a 50-25-25 of VTI-VEA-VWO, with a REIT kicker.

so, while you think you did well with your dividend stock picks last year, you actually underperformed a simple portfolio of global index funds...

and dividend stocks are not a bond substitute. period.
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uberational44
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Re: High dividend stocks as bond substitute?

Post by uberational44 » Fri Jan 19, 2018 8:23 am

I think the key thing would be to buy companies which have a very good chance of surviving the coming years of disruption. A lot of high dividend king stocks have been a sensible investment for the past 100 years. But that doesn't mean they will be safe for the next hundred...
Marketeer investing as a hobby. Interested in modern takes on value investing, passive investing and general contrarianism.

onourway
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Re: High dividend stocks as bond substitute?

Post by onourway » Fri Jan 19, 2018 8:31 am

uberational44 wrote:
Fri Jan 19, 2018 8:23 am
I think the key thing would be to buy companies which have a very good chance of surviving the coming years of disruption. A lot of high dividend king stocks have been a sensible investment for the past 100 years. But that doesn't mean they will be safe for the next hundred...
There are actually very few high dividend stocks that have been good investments for the past 100 years. In fact, it takes looking back only 30 years to see how drastically the landscape changes. And those that do appear to have been good investments for the past 30, 100, however many years, are only apparent in hindsight when we've largely forgotten about all the failed companies you would have needed to avoid when making your selections long ago.

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Re: High Dividend Stocks as bond substitute?

Post by dwickenh » Fri Jan 19, 2018 8:42 am

Stocks pay dividends and Bonds pay interest. In case of bankruptcy, bonds are first in line(as long as the government allows) and stockholders are near the last. Don't confuse the two as interchangeable because they don't perform the same function in an Asset Allocation. If you want safety, go with bonds. If you want more risk, go with dividend paying stocks.
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

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Re: High dividend stocks as bond substitute?

Post by uberational44 » Fri Jan 19, 2018 8:43 am

onourway wrote:
Fri Jan 19, 2018 8:31 am
uberational44 wrote:
Fri Jan 19, 2018 8:23 am
I think the key thing would be to buy companies which have a very good chance of surviving the coming years of disruption. A lot of high dividend king stocks have been a sensible investment for the past 100 years. But that doesn't mean they will be safe for the next hundred...
There are actually very few high dividend stocks that have been good investments for the past 100 years. In fact, it takes looking back only 30 years to see how drastically the landscape changes. And those that do appear to have been good investments for the past 30, 100, however many years, are only apparent in hindsight when we've largely forgotten about all the failed companies you would have needed to avoid when making your selections long ago.
Actually I agree with you - 100 years is too long. If you go back far enough the dividend players today were the "bitcoin"/"blockchains" of their time - like utilities companies in the 1920s. Still, I think my argument applies but maybe over a shorter time period like 20 years

Looking at the dividend kings, all have increased dividends over a very long time - 50 years it seems:

https://www.suredividend.com/dividend-kings/

But there are some stocks in there which I think are going to struggle in the next few years like Procter & Gamble (PG). It's hard to imagine a big, bloated blue-ship like P&G being able to compete with Amazon or Alibaba.
Marketeer investing as a hobby. Interested in modern takes on value investing, passive investing and general contrarianism.

onourway
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Re: High dividend stocks as bond substitute?

Post by onourway » Fri Jan 19, 2018 8:51 am

uberational44 wrote:
Fri Jan 19, 2018 8:43 am

Actually I agree with you - 100 years is too long. If you go back far enough the dividend players today were the "bitcoin"/"blockchains" of their time - like utilities companies in the 1920s. Still, I think my argument applies but maybe over a shorter time period like 20 years

Looking at the dividend kings, all have increased dividends over a very long time - 50 years it seems:

https://www.suredividend.com/dividend-kings/

But there are some stocks in there which I think are going to struggle in the next few years like Procter & Gamble (PG). It's hard to imagine a big, bloated blue-ship like P&G being able to compete with Amazon or Alibaba.
The problem with these lists is that they are picking the winners in hindsight. Just like with the market as a whole, it doesn't tell us much of anything about what will happen in the future.

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Re: High Dividend Stocks as bond substitute?

Post by Valuethinker » Fri Jan 19, 2018 9:07 am

OldSport wrote:
Fri Jan 19, 2018 7:56 am
Grt2bOutdoors wrote:
Fri Jan 19, 2018 7:42 am
Equities are not bonds, nor are they a substitute.
Agree but the OP does have a point with being at end of a secular bond bull market. Bond rates should rise in the next few years.
After all, they did so from these levels for the Eurozone and for Japan?
Equities are not a bond substitute, but what about 20% minimum volatility fund and 80% short term investment grade as a bond substitute? That is not particularly tax efficient but could work in a tax sheltered account.
How did that look in 2008-09?

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Re: High dividend stocks as bond substitute?

Post by Valuethinker » Fri Jan 19, 2018 9:08 am

onourway wrote:
Fri Jan 19, 2018 8:31 am
uberational44 wrote:
Fri Jan 19, 2018 8:23 am
I think the key thing would be to buy companies which have a very good chance of surviving the coming years of disruption. A lot of high dividend king stocks have been a sensible investment for the past 100 years. But that doesn't mean they will be safe for the next hundred...
There are actually very few high dividend stocks that have been good investments for the past 100 years. In fact, it takes looking back only 30 years to see how drastically the landscape changes. And those that do appear to have been good investments for the past 30, 100, however many years, are only apparent in hindsight when we've largely forgotten about all the failed companies you would have needed to avoid when making your selections long ago.
Does not GE come to mind?

Hard to think of a more steady, reliable dividend payer in the last 38 years. The ultimate blue chip. Look at the market positions. Look at the diverse portfolio of businesses.

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Re: High Dividend Stocks as bond substitute?

Post by nisiprius » Fri Jan 19, 2018 9:11 am

Stocks are not bonds, period.

Bonds are less risky than stocks, not because of any statistical patterns in past prices, but because they are a fundamentally different thing. A bond is a legally enforceable contract to pay specific numbers of dollars on specific days. It's a bill the issuer has to pay, like the payroll and the electric bill. Dividends are promises at all, certainly not promises with numbers attached to them.

To the extent that dividend stocks are slightly bond-like stocks, they are subject to whatever bonds are subject to. Simply because they are stocks does not make them magically free of interest-rate risk. If interest rates rise, dividend stocks will experience downward price pressure for the same reason stocks do.

As is frequently the case, the question that needs to be asked is not "how do dividend stocks compare with the stock market as a whole?" but "how does focussing on dividend stocks compare with continuing to invest in the total stock market, but cutting down on stock allocation slightly and increasing bond allocation slightly?"
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Re: High Dividend Stocks as bond substitute?

Post by Valuethinker » Fri Jan 19, 2018 9:13 am

triyoda wrote:
Fri Jan 19, 2018 12:07 am
First, I find this forum very useful, lots of good information here. I feel like I am ready to drink the proverbial coolaid and commit to an asset allocation model portfolio. In principal I would like to go 70/30 stocks bonds, but I am really concerned about macro issues that surround bonds.

1. From what I read and think I understand, we are at or near the end of a prolongued (35 year) bond bull market. I wish it was 1984, a recent article (I think in Barron's) indicated in 1984 you could get a 30 year Treasury yielding 14%, when inflation was only at 4% (10% real return). What a great investment that would have been.
And those bonds were in fact, callable. https://www.sapling.com/7796395/treasury-bonds-callable
2. In any case, it seems like from the "bottom" of a bond bull market, it actually continues to get worse before it gets better. Short term bond funds are only going to return about 1-2% in the next few years. Any bonds longer than 1-2 years are going to drop in price as rates rise. So, if I look ahead and say what is the best case scenario for bonds over the next 2-3 year. Best case is I get a 2% return on a broad market bond portfolio allocation. It seems like until rates for 5 year treasuries hit 4%, the best strategy is to just stay out unless you thought the stock market was very risky.
As, at these yields, it was the bottom for the Eurozone German government bond market? And the Japanese govt bond market?

It has also been the bottom on this forum for bonds in at the very least, 2010, 2011, 2012, 2013, 2014, 2015, 2016 ...
3. I am very committed to dividend stocks and have invested in a lot of drips. I am trying to wean myself off this, get less exposure to individual stocks and more into an asset allocation using index funds.

4. For 2017, my drips with my computershare account returned 22.3% including a 3.8% yield (portfolio of Verizon, Phillip Morris, Altria, Abbot Labs and Abbvie). I had built this lineup based on being lower risk, higher yield. It helped that Abbot and Abbvie had a really good year, just lucky I guess.

5. For some reason I like telecons and currently hold Vodaphone (5.2% yield), Verizon (4.5% yield) and Deutsch Telecom (3.84% yield) and I feel like it would be lower risk (at least over the next two years) to be only 10-15% in bonds and substitute some selected high dividend stocks like the telecoms. I feel like the cellphone rate wars are mostly over and telecoms should be quite stable and the dividends are very safe.

Overall, based on where the bond market is and because I expect it will change gradually I can't convince myself to commit to a full bondd asset allocation. Talk me into the asset allocation.
You have a lot of specific risk. And why MO & not Imperial Tobacco and BAT? Since you are willing to hold VOD and DT (ie non US stocks, although BAT has large North American exposure).

onourway
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Re: High Dividend Stocks as bond substitute?

Post by onourway » Fri Jan 19, 2018 9:18 am

The fear that one has with bond funds is that interest rates will rise, causing bond prices to fall. So what you should do is look back in history for a period when interest rates rose, and look at what happened to bonds.

2004-2006 was such a period. The Federal Funds Rate rose from 1% to over 5% in just over 2 years.
Image

What happened to bonds during that period?

Image

OldSport
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Re: High Dividend Stocks as bond substitute?

Post by OldSport » Fri Jan 19, 2018 9:20 am

Valuethinker wrote:
Fri Jan 19, 2018 9:07 am
OldSport wrote:
Fri Jan 19, 2018 7:56 am
Grt2bOutdoors wrote:
Fri Jan 19, 2018 7:42 am
Equities are not bonds, nor are they a substitute.
Agree but the OP does have a point with being at end of a secular bond bull market. Bond rates should rise in the next few years.
After all, they did so from these levels for the Eurozone and for Japan?
Equities are not a bond substitute, but what about 20% minimum volatility fund and 80% short term investment grade as a bond substitute? That is not particularly tax efficient but could work in a tax sheltered account.
How did that look in 2008-09?
Vanguard Global Minimum Volatility did not exist then. This is also not the same. Interest rates were initially higher and were lowered during this period driving total bond returns more positive.

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Re: High Dividend Stocks as bond substitute?

Post by OldSport » Fri Jan 19, 2018 9:21 am

onourway wrote:
Fri Jan 19, 2018 9:18 am
The fear that one has with bond funds is that interest rates will rise, causing bond prices to fall. So what you should do is look back in history for a period when interest rates rose, and look at what happened to bonds.

2004-2006 was such a period. The Federal Funds Rate rose from 1% to over 5% in just over 2 years.
Image

What happened to bonds during that period?

Image
How did long term bond rates change over that period?

OldSport
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Re: High dividend stocks as bond substitute?

Post by OldSport » Fri Jan 19, 2018 9:23 am

uberational44 wrote:
Fri Jan 19, 2018 8:23 am
I think the key thing would be to buy companies which have a very good chance of surviving the coming years of disruption. A lot of high dividend king stocks have been a sensible investment for the past 100 years. But that doesn't mean they will be safe for the next hundred...
Please clarify/elaborate "coming years of disruption"? Are you referring to the inevitable Bear Market, lower predicted returns over the next 10 years due to todays high valuations, or something else?

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Re: High Dividend Stocks as bond substitute?

Post by dbr » Fri Jan 19, 2018 9:24 am

Stocks are not bonds. Allocation should be set by need, ability, and willingness to take risk. Sometimes there are no cherries, only pits, in the bowl.

onourway
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Re: High Dividend Stocks as bond substitute?

Post by onourway » Fri Jan 19, 2018 9:26 am

OldSport wrote:
Fri Jan 19, 2018 9:21 am
How did long term bond rates change over that period?
Looks like the 10 year treasury rose modestly from ~3.8% to ~5.2%.

rgs92
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Re: High Dividend Stocks as bond substitute?

Post by rgs92 » Fri Jan 19, 2018 9:30 am

It is not a given that bond rates will rise. International bond yields are still near zero, so this will put pressure on US bond yields (downwards).
So who knows if bonds are a bad investment? You really can't say for sure. Thus there is no reason to time the bond market or change your asset allocation.

(Like they say, everything you know is wrong.)

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Re: High Dividend Stocks as bond substitute?

Post by Grt2bOutdoors » Fri Jan 19, 2018 1:22 pm

bgf wrote:
Fri Jan 19, 2018 8:15 am
triyoda wrote:
Fri Jan 19, 2018 12:07 am
4. For 2017, my drips with my computershare account returned 22.3% including a 3.8% yield (portfolio of Verizon, Phillip Morris, Altria, Abbot Labs and Abbvie). I had built this lineup based on being lower risk, higher yield. It helped that Abbot and Abbvie had a really good year, just lucky I guess.
my portfolio, which includes around a 5% cash/bond drag plus all transaction costs and retirement account fees and expenses, returned 22.9% last year. it is basically just a 50-25-25 of VTI-VEA-VWO, with a REIT kicker.

so, while you think you did well with your dividend stock picks last year, you actually underperformed a simple portfolio of global index funds...

and dividend stocks are not a bond substitute. period.
ABBV has a drug, Humira, when it goes off patent in 2021, what will they do for an encore? Right now, they charge 10K a shot for it or so I've been informed. Abbott which spun off Abbie Vie just bought St. Jude Medical (heart valves, pacemakers, rhythm management) in early 2017. Anyone who bought ABT over the last 30-40 years has done well, but it doesn't mean that it will continue to do well forever.

BGF - holding a 50% slice of Emerging Markets in your international equities is a heavy overweight vs. the market cap. You can call it fortuitous timing or market timing on your part, but there is nothing "simple" about it. Nor is it recommended by any of the major fund complexes. Its not for the faint of heart. One should invest according to need, ability and willingness, what might be good for you may not be for the OP. If you want to make a point to OP you should be honest with how you weighed your investments - 50/50 domestic international, essentially you own 100% equities. That is a full-on beta portfolio. To your point, dividend stocks are not bonds, ever.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: High Dividend Stocks as bond substitute?

Post by mega317 » Fri Jan 19, 2018 2:22 pm

From what I read and think I understand, we are at or near the end of a prolongued (35 year) bond bull market.
Search for nisiprius's recent posts about the bond bubble and impending "collapse" or "massacre".
I am very committed to dividend stocks and have invested in a lot of drips. I am trying to wean myself off this
How can you say this, then go on to talk about how great your individual stocks have done, and your future plans for individual stocks?
It helped that Abbot and Abbvie had a really good year, just lucky I guess.
Yep
For some reason
Not a great foundation for building a portfolio.


Bank of American cut their dividend by about 99% over the course of 2 quarters in 2008-09, and is still less than 20% of what it was. AIG INCREASED their dividend AFTER Lehman collapsed and its own share price had dropped by like 70%, and that was the last dividend for 5 years. The interest on BND stayed within about a 10% range during that time.

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Re: High Dividend Stocks as bond substitute?

Post by Grt2bOutdoors » Fri Jan 19, 2018 2:57 pm

mega317 wrote:
Fri Jan 19, 2018 2:22 pm


Bank of American cut their dividend by about 99% over the course of 2 quarters in 2008-09, and is still less than 20% of what it was. The interest on BND stayed within about a 10% range during that time.
If you're going to make a statement like that it helps if you include some additional information - total shares outstanding at y/e 2017 were 224% more than they were in 2007 when the dividend was 2.40, they were forced to acquire an albatross by your elected representatives - Countrywide Mortgage, they also bought Merrill Lynch (overpaid) when they should have passed and let it collapse under its own weight of subprime debt. Cherry picking is fine when you want to make a point, but overall, what is the incidence of a complete and total failure of a diversified basket of dividend paying equities? Own enough of everything and you lessen the odds of portfolio failure.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: High dividend stocks as bond substitute?

Post by patrick013 » Fri Jan 19, 2018 3:01 pm

uberational44 wrote:
Fri Jan 19, 2018 8:23 am
I think the key thing would be to buy companies which have a very good chance of surviving the coming years of disruption. A lot of high dividend king stocks have been a sensible investment for the past 100 years. But that doesn't mean they will be safe for the next hundred...
Image
Most analysts caution holding longer term bonds or dividend stocks
during periods of steadily rising interest rates.

VCIT=VG corp bond fund
VPU=VG utility fund
age in bonds, buy-and-hold, 10 year business cycle

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Re: High Dividend Stocks as bond substitute?

Post by bgf » Fri Jan 19, 2018 3:06 pm

Grt2bOutdoors wrote:
Fri Jan 19, 2018 1:22 pm
bgf wrote:
Fri Jan 19, 2018 8:15 am
triyoda wrote:
Fri Jan 19, 2018 12:07 am
4. For 2017, my drips with my computershare account returned 22.3% including a 3.8% yield (portfolio of Verizon, Phillip Morris, Altria, Abbot Labs and Abbvie). I had built this lineup based on being lower risk, higher yield. It helped that Abbot and Abbvie had a really good year, just lucky I guess.
my portfolio, which includes around a 5% cash/bond drag plus all transaction costs and retirement account fees and expenses, returned 22.9% last year. it is basically just a 50-25-25 of VTI-VEA-VWO, with a REIT kicker.

so, while you think you did well with your dividend stock picks last year, you actually underperformed a simple portfolio of global index funds...

and dividend stocks are not a bond substitute. period.
ABBV has a drug, Humira, when it goes off patent in 2021, what will they do for an encore? Right now, they charge 10K a shot for it or so I've been informed. Abbott which spun off Abbie Vie just bought St. Jude Medical (heart valves, pacemakers, rhythm management) in early 2017. Anyone who bought ABT over the last 30-40 years has done well, but it doesn't mean that it will continue to do well forever.

BGF - holding a 50% slice of Emerging Markets in your international equities is a heavy overweight vs. the market cap. You can call it fortuitous timing or market timing on your part, but there is nothing "simple" about it. Nor is it recommended by any of the major fund complexes. Its not for the faint of heart. One should invest according to need, ability and willingness, what might be good for you may not be for the OP. If you want to make a point to OP you should be honest with how you weighed your investments - 50/50 domestic international, essentially you own 100% equities. That is a full-on beta portfolio. To your point, dividend stocks are not bonds, ever.
i disagree with your characterization. 50-25-25 is plenty simple. it is basically a 1/n portfolio, i.e., between US and International, i split them 1/2, 50-50. between International Developed and Emerging, i split them, 1/2, 50-50.

in comparison to current global market cap weighting, i have more emerging markets and less international developed. i think VT is something like 55-35-10.

i also hold about 10% REITs, which, again, is split 50-50 between US and International (VNQ +VNQI). so, compared to market cap weighting, i am overweight Emerging and REITs.

i do not adhere strictly to a global cap weighting, and neither do most BHs for that matter. Any 60-40 equity-bond allocation diverts from global cap weighting. as does any 70-30 or 80-20.

from where im sitting, it seems like my divergence from global cap weighting with my equity allocation is less significant than BH decision to diverge from global market cap weighting with respect to allocation between Bonds and Equities.

That doesn't even get into commodities and other assets.

with respect to OP, apart from the part of the portfolio that i stated was cash + bonds, ~5%, the remainder is equities. however, OP's portfolio of dividend paying stocks is obviously 100% stocks. my benchmark is 95% VT and 5% BND. i outperformed that benchmark by just a smidge last year, and i think that benchmark portfolio outperformed OPs stock portfolio, though its probably close.

my point was that OP is doing a lot of work trying to pick stocks and isn't outperforming a simple global index portfolio.

also, the IRR of my portfolio includes retirement fees and expenses for Simple IRAs and 403bs, all my transaction fees, etc. from my forays into seekingalpha.com, most DGI don't take those into account. they don't even know how to calculate the IRR of their dividend growth portfolio and don't know appropriate benchmarks.
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Re: High Dividend Stocks as bond substitute?

Post by mega317 » Fri Jan 19, 2018 5:12 pm

Grt2bOutdoors: I'm not arguing against holding a diversified basket of dividend paying equities. I'm arguing against
triyoda wrote:
Fri Jan 19, 2018 12:07 am
only 10-15% in bonds and substitute some selected high dividend stocks

Grt2bOutdoors
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Re: High Dividend Stocks as bond substitute?

Post by Grt2bOutdoors » Sat Jan 20, 2018 2:30 pm

mega317 wrote:
Fri Jan 19, 2018 5:12 pm
Grt2bOutdoors: I'm not arguing against holding a diversified basket of dividend paying equities. I'm arguing against
triyoda wrote:
Fri Jan 19, 2018 12:07 am
only 10-15% in bonds and substitute some selected high dividend stocks
Agree with you.
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BeBH65
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Re: High dividend stocks as bond substitute?

Post by BeBH65 » Sun Jan 21, 2018 8:21 am

uberational44 wrote:
Fri Jan 19, 2018 8:43 am

Looking at the dividend kings, all have increased dividends over a very long time - 50 years it seems:

https://www.suredividend.com/dividend-kings/

But there are some stocks in there which I think are going to struggle in the next few years like Procter & Gamble (PG). It's hard to imagine a big, bloated blue-ship like P&G being able to compete with Amazon or Alibaba.
wikipedia has a list of the turnover of the "SP500 dividend Aristocrats"; apparantly 10 companies lost their Aristocrats status in 2009, and another 10 in 2010. So in 2 years time the index lost almost 40% of its constituents.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

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randomizer
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Re: High Dividend Stocks as bond substitute?

Post by randomizer » Mon Jan 22, 2018 12:29 am

I love the intelligent discussion in this thread. Another example of why this forum is so great.
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Re: High Dividend Stocks as bond substitute?

Post by bearcub » Mon Jan 22, 2018 12:42 am

In 2008 Vanguard High Dividend Yield Fund was - 32.51. Just a thought.

triyoda
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Re: High dividend stocks as bond substitute?

Post by triyoda » Sat Jun 16, 2018 9:32 pm

uberational44 wrote:
Fri Jan 19, 2018 8:23 am
I think the key thing would be to buy companies which have a very good chance of surviving the coming years of disruption. A lot of high dividend king stocks have been a sensible investment for the past 100 years. But that doesn't mean they will be safe for the next hundred...
I'm not that worried about the next 100 years. I'm 43 now, if I make it 50 more years I will be pretty satisfied :D

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Re: High dividend stocks as bond substitute?

Post by triyoda » Sat Jun 16, 2018 9:41 pm

BeBH65 wrote:
Sun Jan 21, 2018 8:21 am
uberational44 wrote:
Fri Jan 19, 2018 8:43 am

Looking at the dividend kings, all have increased dividends over a very long time - 50 years it seems:

https://www.suredividend.com/dividend-kings/

But there are some stocks in there which I think are going to struggle in the next few years like Procter & Gamble (PG). It's hard to imagine a big, bloated blue-ship like P&G being able to compete with Amazon or Alibaba.
wikipedia has a list of the turnover of the "SP500 dividend Aristocrats"; apparantly 10 companies lost their Aristocrats status in 2009, and another 10 in 2010. So in 2 years time the index lost almost 40% of its constituents.
I think you need to consider the extremely high bar for the aristocrats, I think 20-30 consecutive years of dividend increases? Not a surprise that in 2009 and 2010, that 20 companies might miss the mark for one year (and then be out, for at least the next 29 years). In some ways, the aristocrat index is pretty miraculous, to be able to consistently perform for 30 years to one specific metric.

I think this just shows the power of indexing, the index adjusts to represent the desired exposure. Arguably an equity index fund that represents increasing payouts for 30 years is a bond proxy, it is focused on yield. Short of hyper inflation this investment will outperform a 30 year treasury and with lower risk*

*there are many ways to define risk. Risk of lost of principal is one risk. Risk of locking in a really low return for 30 years is another one (which effectively results in a loss of principal if you have to sell the bond before maturity).

I'm struggling with trying to weigh the risk of persistently low bond returns for the next 5-10 years, versus the stock market risk to determine my asset allocation. I would like to commit to the security of bonds, but the yields are horrible. I would be really interested to see a Monte Carlo of stock vs. bond total returns over the next 10 years. I feel like it would suggest 90-100% equity allocation.

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Re: High Dividend Stocks as bond substitute?

Post by nyclon » Sat Jun 16, 2018 9:43 pm

triyoda wrote:
Fri Jan 19, 2018 12:07 am
First, I find this forum very useful, lots of good information here. I feel like I am ready to drink the proverbial coolaid and commit to an asset allocation model portfolio. In principal I would like to go 70/30 stocks bonds, but I am really concerned about macro issues that surround bonds.

1. From what I read and think I understand, we are at or near the end of a prolongued (35 year) bond bull market. I wish it was 1984, a recent article (I think in Barron's) indicated in 1984 you could get a 30 year Treasury yielding 14%, when inflation was only at 4% (10% real return). What a great investment that would have been.

2. In any case, it seems like from the "bottom" of a bond bull market, it actually continues to get worse before it gets better. Short term bond funds are only going to return about 1-2% in the next few years. Any bonds longer than 1-2 years are going to drop in price as rates rise. So, if I look ahead and say what is the best case scenario for bonds over the next 2-3 year. Best case is I get a 2% return on a broad market bond portfolio allocation. It seems like until rates for 5 year treasuries hit 4%, the best strategy is to just stay out unless you thought the stock market was very risky.

3. I am very committed to dividend stocks and have invested in a lot of drips. I am trying to wean myself off this, get less exposure to individual stocks and more into an asset allocation using index funds.

4. For 2017, my drips with my computershare account returned 22.3% including a 3.8% yield (portfolio of Verizon, Phillip Morris, Altria, Abbot Labs and Abbvie). I had built this lineup based on being lower risk, higher yield. It helped that Abbot and Abbvie had a really good year, just lucky I guess.

5. For some reason I like telecons and currently hold Vodaphone (5.2% yield), Verizon (4.5% yield) and Deutsch Telecom (3.84% yield) and I feel like it would be lower risk (at least over the next two years) to be only 10-15% in bonds and substitute some selected high dividend stocks like the telecoms. I feel like the cellphone rate wars are mostly over and telecoms should be quite stable and the dividends are very safe.

Overall, based on where the bond market is and because I expect it will change gradually I can't convince myself to commit to a full bondd asset allocation. Talk me into the asset allocation.
Stock (equity) is less senior than the bond (borrowed) money part of a company's capital structure. That means the company has a contractual obligation to pay back its creditors- the folks who provide the borrowed money. The company doesnt have the same obligations to stock holders, nor do the stock holders have the same contractual protections as the bond holders.

Secondly dividends are not coupon payments. Coupons are meant to provide contractual interest to lenders. Dividends and other forms of equity income are meant to return capital to stock holders.

You are taking a very different, much riskier bet by substituting high dividend stocks for bonds.

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Re: High Dividend Stocks as bond substitute?

Post by dbr » Sun Jun 17, 2018 7:52 am

If you want to hold stocks and not bonds, then that is up to you, but please don't try to think some stocks are bonds. It is no more complicated than that.

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