Interest rates are low and bond forecasts are scary. Substituting high-dividend stocks for bonds is a strong lure for investors. A recent AARP article by Boglehead Allan Roth explains why substituting stocks for bonds can be a major mistake. These are excerpts:
Why-you-shouldnt-substitute-stocks-for-bonds/"One adviser suggested investors in their 60s invest 70 to 80 percent of their portfolio in stocks. I couldn’t disagree more."
"It’s a misconception that interest rates are near an all-time low. What matters is the real return after taxes and inflation. -- Real rates are actually much better today than when we could get 12 percent nominal returns."
"It may seem like AT&T is a very safe company, but so did General Motors and Eastman Kodak at one time. Both paid high dividend yields and were among the 10 most valuable companies on the planet. Both filed for bankruptcy and common shareholders got nothing."
"So far this century, bonds have far outpaced stocks."
"Many of the top economists have correctly predicted the direction of interest rates less than half the time, meaning their forecasting abilities are less accurate than a coin flip."
"Bonds should be safe and boring." -- "I’ve seen too many “new paradigms” end poorly for investors."
Thank you, Allan Roth.