why not dividend stocks instead of Bond Funds?

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Trapper
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why not dividend stocks instead of Bond Funds?

Post by Trapper »

Of all my investments, my bond funds have been my biggest disappointment.
I have rotated into money market mutual funds for my fixed income and capital preservation for the past few years.
The yield curve is not inducing me to rotate back into intermediate or long term bond funds with the fingers crossed hope that interest rates will decline.
I do however do not know the future. In anticipation of some decline in interest rates, or inflation staying the same, or heaven forbid increasing I am now cautiously moving some of my money market funds into solid blue chip dividend payers. The equity dividend funds are not attractive to me as the yield is still too low. I also recognize that individual issue higher yields merit caution with risk.
SO.... My choices so far, KHC, XOM, RIO, LYB .... you get the drift.
What are your critical thoughts?
StartedAt22
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Re: why not dividend stocks instead of Bond Funds?

Post by StartedAt22 »

My thoughts are that you shouldn't buy any individual stocks and they're a terrible proxy / replacement for fixed income in a portfolio.

More advice: stop tinkering

More advice: [profanity removed - moderator Kendall] the yield curve (I'm too stupid to understand or care about its impact)

More advice: you said you don't know the future. Tell yourself that over and over again as you imagine your blue chip stocks going the way of Enron.
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Re: why not dividend stocks instead of Bond Funds?

Post by nisiprius »

1) The market value of anything that produces an income stream is going to be sensitive to interest rates, just like bonds.

2) Interest rate increases reduce the market value of an existing bond, but do not change the number of dollars it pays in coupon interest.

3) Therefore, if you argue that you don't need to care about fluctuations in the market value of dividend stocks because you only care about the dividend payments themselves, exactly the same thing is true of bonds.

4) In the case of dividend stocks, then, you have the same interest rate risk as you do with bonds. But on top of that, you have idiosyncratic stock risk. And the problem that the stability of the dividend is just the custom, tradition, and habit of the stock issuer--as opposed to a legal contract enforceable in court.

5) I may well be wrong about this, but I'm not familiar with any Moody's ratings or anything similar that measure the ability and likelihood that the stock-issuing company will continue to meet its traditional dividend payments. Are you?

6) I don't think it's that easy to identify "solid, blue chip dividend payers." Assuming that the phrase is supposed to imply safety and future stability.
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Re: why not dividend stocks instead of Bond Funds?

Post by pennsylvania211 »

nisiprius wrote: Tue Jul 09, 2024 8:31 am 1) The market value of anything that produces an income stream is going to be sensitive to interest rates, just like bonds.

2) Interest rate increases reduce the market value of an existing bond, but do not change the number of dollars it pays in coupon interest.

3) Therefore, if you argue that you don't need to care about fluctuations in the market value of dividend stocks because you only care about the dividend payments themselves, exactly the same thing is true of bonds.

4) In the case of dividend stocks, then, you have the same interest rate risk as you do with bonds. But on top of that, you have idiosyncratic stock risk. And the problem that the stability of the dividend is just the custom, tradition, and habit of the stock issuer--as opposed to a legal contract enforceable in court.

5) I may well be wrong about this, but I'm not familiar with any Moody's ratings or anything similar that measure the ability and likelihood that the stock-issuing company will continue to meet its traditional dividend payments. Are you?

6) I don't think it's that easy to identify "solid, blue chip dividend payers." Assuming that the phrase is supposed to imply safety and future stability.
+1. Couldn't have said it any better.
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Re: why not dividend stocks instead of Bond Funds?

Post by CyclingDuo »

Trapper wrote: Tue Jul 09, 2024 8:24 am Of all my investments, my bond funds have been my biggest disappointment.
I have rotated into money market mutual funds for my fixed income and capital preservation for the past few years.
The yield curve is not inducing me to rotate back into intermediate or long term bond funds with the fingers crossed hope that interest rates will decline.
I do however do not know the future. In anticipation of some decline in interest rates, or inflation staying the same, or heaven forbid increasing I am now cautiously moving some of my money market funds into solid blue chip dividend payers. The equity dividend funds are not attractive to me as the yield is still too low. I also recognize that individual issue higher yields merit caution with risk.
SO.... My choices so far, KHC, XOM, RIO, LYB .... you get the drift.
What are your critical thoughts?
Tons of threads - if you do a search - on dividends and dividend paying stocks throughout Bogleheads forum.

What happens to dividends (not to mention the underlying stock prices) during bear markets?

We all get to deal with dividends and make decisions on what to do with them. Do we reinvest them in the same equity holding/fund? Do we diversify into other investments with them? Do we use them to dynamically rebalance? Do we spend them? Do we leave them in cash equivalents?

Your question surrounding replacing bond interest with dividends includes a need to look back at what has happened in an attempt to forecast what could happen going forward in terms of reliability. Since more than 400 companies in the S&P 500 pay dividends, we'll look at that index for an example strictly from a dividend standpoint.

Most of us would agree with how severe the dividend cuts were when it comes to talking about big black swan events such as the 1930's Great Depression bear market which you can see depicted in this graphic - a time period when only 10% of the US population actually owned stocks...

Image https://www.youralgo.com/how-to-trade-a-bear-market/

If we look at the subsequent bear markets, we can see the change in the S&P 500 dividends were certainly not quite as dramatic outside of the GFC due to the conditions of the banks being bailed out by the government.

Image
Image

The end of the WWII rationing which was followed by a major recovery in consumer spending on regular goods, allowed earnings and dividends to rise substantially over the 1946-49 time period to the tune of +46.3%.

As mentioned above, the other exception was the financial crisis of 2008-09. This resulted in the S&P 500 dividends being cut by -23.1%. That was largely due to the banks being forced to accept a bailout from the Federal Government. Even the relatively healthy banks like Wells Fargo and JPMorgan Chase remained profitable during the crisis, but were required to accept the bailout so that financial markets wouldn't see which banks were actually on the brink of collapse. One of the conditions of the bailout was that nearly all strategically important financial institutions were pressured to cut their dividends substantially, whether or not they were still supported by current earnings.

Even if we exclude the post World War II +46.3% dividend bounce back, and the financial crisis required dividend cuts that resulted in a -23.1% dividend cut for the S&P 500 as a condition of the bail outs, we can see from the table above that average dividend cuts during recessions represented an average smaller pullback (-1.9%, or -.05% if we include both the post WWII bounce back and the GFC cuts).

It is within reason during recessions/bear markets that a household husbands their expenses from their potentially lower income streams much as if your salary was lower - or didn't rise - for a few years during a segment within your working career. This probably leads one to cut back and adjust to the new level of income. If your passive income dipped -1% to -9% in a normal business cycle recession, would you still call that reliable?

Although you say your bond funds have been a disappointment, what will they be in the future? You don't like dividend paying ETFs or funds due to their yields, but want to increase your idiosyncratic risk of individual stock ownership with higher yields as well as a group of assets that do the same. Do you feel they would act as ballast if and when needed such as bonds? What are your thoughts and study on the difference between total return investing where you can use both dividends + the underlying shares as capital that can be sold to cover your expenses compared to only relying on the dividends produced from the underlying shares (regardless of the share price)? What about location and placement of the bonds/equities regarding taxation? Are they in a Roth account, a traditional IRA, a taxable account? What yield are you seeking? What percentage of your household income (beyond SS and pension streams) needs to come from the equity assets vs. bond assets? Have you considered something such as the purchase of an SPIA to provide a monthly income for a set period?

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Re: why not dividend stocks instead of Bond Funds?

Post by retiredjg »

Stocks are not a substitute for bonds.

You are letting the recent bond market affect how you invest. Hopefully, you know better than to sell stocks when they are having a bad time. Why does it make sense tomconsider selling bonds for that same reason?
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Re: why not dividend stocks instead of Bond Funds?

Post by TomatoTomahto »

I am amazed at how many BHs can’t seem to resist tinkering based on recent results. I guess things never change.
I get the FI part but not the RE part of FIRE.
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Re: why not dividend stocks instead of Bond Funds?

Post by jebmke »

TomatoTomahto wrote: Tue Jul 09, 2024 10:20 am I am amazed at how many BHs can’t seem to resist tinkering based on recent results. I guess things never change.
recency bias is a strong force, not just in finance.
When you discover that you are riding a dead horse, the best strategy is to dismount.
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Re: why not dividend stocks instead of Bond Funds?

Post by arcticpineapplecorp. »

Trapper wrote: Tue Jul 09, 2024 8:24 am Of all my investments, my bond funds have been my biggest disappointment.
I have rotated into money market mutual funds for my fixed income and capital preservation for the past few years.
The yield curve is not inducing me to rotate back into intermediate or long term bond funds with the fingers crossed hope that interest rates will decline.
I do however do not know the future. In anticipation of some decline in interest rates, or inflation staying the same, or heaven forbid increasing I am now cautiously moving some of my money market funds into solid blue chip dividend payers. The equity dividend funds are not attractive to me as the yield is still too low. I also recognize that individual issue higher yields merit caution with risk.
SO.... My choices so far, KHC, XOM, RIO, LYB .... you get the drift.
What are your critical thoughts?
you can call the following cherry picking if you like but Stocks are NOT bonds. You do have to deal with the volatility that goes along with your "solid blue chip dividend payers" stocks. I looked at the stocks you mentioned and compared them to the total bond market index fund. testfol.io only went back to 9/17/2012 presumably because one of the stocks you listed only goes back that far. But what I noticed was the volatility of your stocks as opposed to total bond market index fund in 2020 (the first 30% decline we had since the Great Recession). Look at the info below:

Image

source

The drawdown of total bond pales in comparison with the stocks you selected. Half of your blue chip stock picks were under water 7 years into that investment while the bond market was up 20% over those years.

Why you think "solid blue chip dividend payers" stocks will act like fixed income during a time of crisis is beyond me. You want the greater returns that go along with stocks, but if you already own stocks, why would you replace bonds with...more stocks?

dividends go away too sometimes and then you may be stuck with a stock that's underperformed and isn't giving you the dividends you hoped for.

by the way, this question has been asked many times before:
https://www.google.com/search?sitesearc ... d+of+bonds

also there's no such thing as "blue chip". That was a phrase to convince people that stocks were SAFE choices of investments. There are many stocks that were once blue chip that are not so blue chip anymore. Look at GE:

https://testfol.io/?d=eJytj01PwzAMhv%2B ... H0HIhus%3D

that's only one example. There are many stocks that were once in the Dow or S&P500 that aren't anymore.

I once had a coworker yelling at his son who managed my coworker's investments for him, saying "I THOUGHT YOU SAID AIG WAS SAFE!!"

Not so safe, right?
Last edited by arcticpineapplecorp. on Tue Jul 09, 2024 12:38 pm, edited 1 time in total.
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Re: why not dividend stocks instead of Bond Funds?

Post by muffins14 »

Trapper wrote: Tue Jul 09, 2024 8:24 am Of all my investments, my bond funds have been my biggest disappointment.
I have rotated into money market mutual funds for my fixed income and capital preservation for the past few years.
The yield curve is not inducing me to rotate back into intermediate or long term bond funds with the fingers crossed hope that interest rates will decline.
I do however do not know the future. In anticipation of some decline in interest rates, or inflation staying the same, or heaven forbid increasing I am now cautiously moving some of my money market funds into solid blue chip dividend payers. The equity dividend funds are not attractive to me as the yield is still too low. I also recognize that individual issue higher yields merit caution with risk.
SO.... My choices so far, KHC, XOM, RIO, LYB .... you get the drift.
What are your critical thoughts?
The intention of a bond is either to provide fixed income or as a tool to reduce medium-term portfolio volatility.

I don’t think stock dividends are fixed. And being stocks, they are not going to meaningfully reduce the variation of medium-term returns compared to other stocks.
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Trapper
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Re: why not dividend stocks instead of Bond Funds?

Post by Trapper »

Great points being made. Thank you all.
I think I am going to revisit this thread in 3-5 years and see how I made out.
I am bullish on the USA.
I am not confident on how and when interest rates will change.
I know that I do not want to put long term money into intermediate or long bonds at current rates.
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Re: why not dividend stocks instead of Bond Funds?

Post by nisiprius »

Trapper wrote: Tue Jul 09, 2024 11:18 am ...I am bullish on the USA...
Why would that sentiment not apply to US bonds as well a stocks?

I see how feelings about the United States could weigh into decisions about US/international allocation, but I don't see how it would weigh into decisions about stock/bond allocation.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: why not dividend stocks instead of Bond Funds?

Post by muffins14 »

Trapper wrote: Tue Jul 09, 2024 11:18 am.
I know that I do not want to put long term money into intermediate or long bonds at current rates.
I can imagine few times better in the last 20-30 years to lock in good rates. What is your rationale for thinking the opposite? Looking for more than 2% real return?

Also not sure how being bullish on the USA implies that LyondellBasell industries is an obviously good investment decision
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Re: why not dividend stocks instead of Bond Funds?

Post by mhc »

jebmke wrote: Tue Jul 09, 2024 10:22 am
TomatoTomahto wrote: Tue Jul 09, 2024 10:20 am I am amazed at how many BHs can’t seem to resist tinkering based on recent results. I guess things never change.
recency bias is a strong force, not just in finance.
Fortunately, my laziness is stronger than recency bias. :D
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Re: why not dividend stocks instead of Bond Funds?

Post by jebmke »

mhc wrote: Tue Jul 09, 2024 11:49 am
jebmke wrote: Tue Jul 09, 2024 10:22 am
TomatoTomahto wrote: Tue Jul 09, 2024 10:20 am I am amazed at how many BHs can’t seem to resist tinkering based on recent results. I guess things never change.
recency bias is a strong force, not just in finance.
Fortunately, my laziness is stronger than recency bias. :D
he looked, he shrugged, he did nothing. :beer
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Trapper
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Re: why not dividend stocks instead of Bond Funds?

Post by Trapper »

nisiprius asks, "Why would that sentiment not apply to US bonds as well a stocks? "
muffins14 asks, "What is your rationale for thinking the opposite? Looking for more than 2% real return?"

Without touching the third rail of prohibited BH topics I am positioning for the possibility of an environment of higher inflation. (and accompanying higher interest rates).
If it comes, both stocks & bonds will lose value, but I prefer to be heavier on the equity side in this environment.
If current rates stabilize or decline my equity holdings will also be a good place. The risk of bad events will always be present with any individual stock issue. When I think on this, I think of the BP oil spill in the Gulf of Mexico rather than the outright fraud by Enron or AIG and hope I can manage to stay away from such companies.
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Re: why not dividend stocks instead of Bond Funds?

Post by jebmke »

Morningstar used to have a forum for stock pickers and market timers. Don't know if those still exist. Won't get a lot of action here on stock picking. A bit more on market timing.
When you discover that you are riding a dead horse, the best strategy is to dismount.
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Re: why not dividend stocks instead of Bond Funds?

Post by seajay »

Trapper wrote: Tue Jul 09, 2024 8:24 am Of all my investments, my bond funds have been my biggest disappointment.
I have rotated into money market mutual funds for my fixed income and capital preservation for the past few years.
The yield curve is not inducing me to rotate back into intermediate or long term bond funds with the fingers crossed hope that interest rates will decline.
I do however do not know the future. In anticipation of some decline in interest rates, or inflation staying the same, or heaven forbid increasing I am now cautiously moving some of my money market funds into solid blue chip dividend payers. The equity dividend funds are not attractive to me as the yield is still too low. I also recognize that individual issue higher yields merit caution with risk.
SO.... My choices so far, KHC, XOM, RIO, LYB .... you get the drift.
What are your critical thoughts?
Some prefer to switch bond risk over to the stock side, 50/50 stock/hard cash perhaps. Depending upon your requirements that may or may not be more fitting. You don't have to rely upon dividends, SWR drawn out of total returns might be considered as a form of DIY dividends/interest.
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Re: why not dividend stocks instead of Bond Funds?

Post by gammalaser »

These posts are very confusing. You say you want to be prepared for any scenario yet are wanting to take action based on that? Isn't basis for BH "stand there and do nothing" is to find an AA that you can stick with long term that is resilient to all forms of market action?

It sounds like you want to move investments in hopes of being prepared for something to happen but no specific reasoning or change in risk profile that is causing it.
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Re: why not dividend stocks instead of Bond Funds?

Post by BirdFood »

Trapper wrote: Tue Jul 09, 2024 11:18 am Great points being made. Thank you all.
I think I am going to revisit this thread in 3-5 years and see how I made out.
I am bullish on the USA.
I am not confident on how and when interest rates will change.
I know that I do not want to put long term money into intermediate or long bonds at current rates.
US Treasuries are paying at or above 4.4%. What is your goal interest rate?

I also want to note that stock dividends aren't significantly different from selling stock shares. I'm concerned that you may be taking on a lot of extra risk just to make money arrive in a "paycheck"-like format rather than pushing the button to make the paycheck show up.
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Re: why not dividend stocks instead of Bond Funds?

Post by bogles the mind »

BirdFood wrote: Tue Jul 09, 2024 12:47 pm
Trapper wrote: Tue Jul 09, 2024 11:18 am Great points being made. Thank you all.
I think I am going to revisit this thread in 3-5 years and see how I made out.
I am bullish on the USA.
I am not confident on how and when interest rates will change.
I know that I do not want to put long term money into intermediate or long bonds at current rates.
US Treasuries are paying at or above 4.4%. What is your goal interest rate?

I also want to note that stock dividends aren't significantly different from selling stock shares. I'm concerned that you may be taking on a lot of extra risk just to make money arrive in a "paycheck"-like format rather than pushing the button to make the paycheck show up.
If you continually sell shares rather than take dividends, don't you end up with 0 shares eventually?
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Re: why not dividend stocks instead of Bond Funds?

Post by sailaway »

bogles the mind wrote: Tue Jul 09, 2024 1:31 pm
BirdFood wrote: Tue Jul 09, 2024 12:47 pm
Trapper wrote: Tue Jul 09, 2024 11:18 am Great points being made. Thank you all.
I think I am going to revisit this thread in 3-5 years and see how I made out.
I am bullish on the USA.
I am not confident on how and when interest rates will change.
I know that I do not want to put long term money into intermediate or long bonds at current rates.
US Treasuries are paying at or above 4.4%. What is your goal interest rate?

I also want to note that stock dividends aren't significantly different from selling stock shares. I'm concerned that you may be taking on a lot of extra risk just to make money arrive in a "paycheck"-like format rather than pushing the button to make the paycheck show up.
If you continually sell shares rather than take dividends, don't you end up with 0 shares eventually?
If stock performance gives this result, the same market conditions will mean that the dividend paying stock is nearly worthless and paying minuscule dividends, as well.
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Re: why not dividend stocks instead of Bond Funds?

Post by the_wiki »

bogles the mind wrote: Tue Jul 09, 2024 1:31 pm
BirdFood wrote: Tue Jul 09, 2024 12:47 pm
Trapper wrote: Tue Jul 09, 2024 11:18 am Great points being made. Thank you all.
I think I am going to revisit this thread in 3-5 years and see how I made out.
I am bullish on the USA.
I am not confident on how and when interest rates will change.
I know that I do not want to put long term money into intermediate or long bonds at current rates.
US Treasuries are paying at or above 4.4%. What is your goal interest rate?

I also want to note that stock dividends aren't significantly different from selling stock shares. I'm concerned that you may be taking on a lot of extra risk just to make money arrive in a "paycheck"-like format rather than pushing the button to make the paycheck show up.
If you continually sell shares rather than take dividends, don't you end up with 0 shares eventually?
If you take the same amount either way, no. Often you have MORE money in non dividend stock portfolio, because they have historically had higher total returns.

Say you have a $1 million in dividend stock. We will use S&P500 high dividend index stock fund as an example. It has yielded 4.5% average dividends. That would give you about 45,000 a year in income. Over the last 8 years that would have grown to about 1.4 million and your income would have grown to about $63k

Now compare that to owning $1 million in regular S&P500. The dividend is about 1.3% on that, so you sell shares to reach 4.5% total and pull out $45,000 a year. Even though you are selling a small percentage of shares each year, the value would have grown to 2.1 million and the monthly income to $87k.
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Re: why not dividend stocks instead of Bond Funds?

Post by bogles the mind »

the_wiki wrote: Tue Jul 09, 2024 1:50 pm
bogles the mind wrote: Tue Jul 09, 2024 1:31 pm
BirdFood wrote: Tue Jul 09, 2024 12:47 pm
Trapper wrote: Tue Jul 09, 2024 11:18 am Great points being made. Thank you all.
I think I am going to revisit this thread in 3-5 years and see how I made out.
I am bullish on the USA.
I am not confident on how and when interest rates will change.
I know that I do not want to put long term money into intermediate or long bonds at current rates.
US Treasuries are paying at or above 4.4%. What is your goal interest rate?

I also want to note that stock dividends aren't significantly different from selling stock shares. I'm concerned that you may be taking on a lot of extra risk just to make money arrive in a "paycheck"-like format rather than pushing the button to make the paycheck show up.
If you continually sell shares rather than take dividends, don't you end up with 0 shares eventually?
If you take the same amount either way, no. Often you have MORE money in non dividend stock portfolio, because they have historically had higher total returns.

Say you have a $1 million in dividend stock. We will use S&P500 high dividend index stock fund as an example. It has yielded 4.5% average dividends. That would give you about 45,000 a year in income. Over the last 8 years that would have grown to about 1.4 million and your income would have grown to about $63k

Now compare that to owning $1 million in regular S&P500. The dividend is about 1.3% on that, so you sell shares to reach 4.5% total and pull out $45,000 a year. Even though you are selling a small percentage of shares each year, the value would have grown to 2.1 million and the monthly income to $87k.
Got it. The lower dividend paying stock will appreciate faster in theroy.
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Re: why not dividend stocks instead of Bond Funds?

Post by rockstar »

Dividends grow. No reason to yield hunt when you can wait as it goes up over time. But equities are not bonds.
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Re: why not dividend stocks instead of Bond Funds?

Post by jebmke »

bogles the mind wrote: Tue Jul 09, 2024 2:01 pm
the_wiki wrote: Tue Jul 09, 2024 1:50 pm
bogles the mind wrote: Tue Jul 09, 2024 1:31 pm
BirdFood wrote: Tue Jul 09, 2024 12:47 pm
Trapper wrote: Tue Jul 09, 2024 11:18 am Great points being made. Thank you all.
I think I am going to revisit this thread in 3-5 years and see how I made out.
I am bullish on the USA.
I am not confident on how and when interest rates will change.
I know that I do not want to put long term money into intermediate or long bonds at current rates.
US Treasuries are paying at or above 4.4%. What is your goal interest rate?

I also want to note that stock dividends aren't significantly different from selling stock shares. I'm concerned that you may be taking on a lot of extra risk just to make money arrive in a "paycheck"-like format rather than pushing the button to make the paycheck show up.
If you continually sell shares rather than take dividends, don't you end up with 0 shares eventually?
If you take the same amount either way, no. Often you have MORE money in non dividend stock portfolio, because they have historically had higher total returns.

Say you have a $1 million in dividend stock. We will use S&P500 high dividend index stock fund as an example. It has yielded 4.5% average dividends. That would give you about 45,000 a year in income. Over the last 8 years that would have grown to about 1.4 million and your income would have grown to about $63k

Now compare that to owning $1 million in regular S&P500. The dividend is about 1.3% on that, so you sell shares to reach 4.5% total and pull out $45,000 a year. Even though you are selling a small percentage of shares each year, the value would have grown to 2.1 million and the monthly income to $87k.
Got it. The lower dividend paying stock will appreciate faster in theroy.
yes, ceteris paribus; if they didn't, arbitrageurs would move in and make it so.
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Re: why not dividend stocks instead of Bond Funds?

Post by muffins14 »

bogles the mind wrote: Tue Jul 09, 2024 1:31 pm
BirdFood wrote: Tue Jul 09, 2024 12:47 pm
Trapper wrote: Tue Jul 09, 2024 11:18 am Great points being made. Thank you all.
I think I am going to revisit this thread in 3-5 years and see how I made out.
I am bullish on the USA.
I am not confident on how and when interest rates will change.
I know that I do not want to put long term money into intermediate or long bonds at current rates.
US Treasuries are paying at or above 4.4%. What is your goal interest rate?

I also want to note that stock dividends aren't significantly different from selling stock shares. I'm concerned that you may be taking on a lot of extra risk just to make money arrive in a "paycheck"-like format rather than pushing the button to make the paycheck show up.
If you continually sell shares rather than take dividends, don't you end up with 0 shares eventually?
Sure, after you’ve sold your entire portfolio. it depends if you want to save like 25x and then deplete your portfolio or save like 50x and then live off the dividends. most people can’t save 50x expenses so they deal with the fact that they have to sell some shares.

keep in mind though that shares appreciate. So if you need to sell 100 shares today for expenses, you might only need to sell 50 shares in 2030; because each share is worth more. Or maybe 25 shares in 2040, 12 shares in 2050 etc.
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Re: why not dividend stocks instead of Bond Funds?

Post by gavinsiu »

If you have a diversified portfolio, parts of your portfolio will almost always be a disappointment. This is by design because the portfolio is designed to weather different conditions, but people will see those component design to protect them when things go awry as under performers and replace them with some thing with better performance.

This is then exacerbated by regency bias. The investor tend look back and see structure the portfolio to either correct the most reason negative event which is currently the bond bear market. Now everyone wants to replace bonds when in 2009, everyone wanted to replace stocks. I have to say that if your goal is to have something as safe as bond, you cannot replace them with more equity. At least replace it with other fixed income like cash or shorter bonds.

Imagine a scenario. Investor invest in the 90's. The 90's were insanely great, so much that they put everything into stock, then the dotcom bubble burst. Now those stocks are under performing and by 2008, the writing is on the wall, so they go to bonds. You miss out on the stock bull years rush. It's not the 90's but it's still higher than bonds. Your bond return goes to near zero and then in 2022 it gets hammered. You go back to Stock even though valuation is starting to looking like the dotcot bubble and ...
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Re: why not dividend stocks instead of Bond Funds?

Post by nisiprius »

bogles the mind wrote: Tue Jul 09, 2024 1:31 pm
BirdFood wrote: Tue Jul 09, 2024 12:47 pm ...I also want to note that stock dividends aren't significantly different from selling stock shares. I'm concerned that you may be taking on a lot of extra risk just to make money arrive in a "paycheck"-like format rather than pushing the button to make the paycheck show up...
If you continually sell shares rather than take dividends, don't you end up with 0 shares eventually?
Unless you're playing a verbal riddle game, no.

What happens if you use realistic numbers is that if you continually sell shares, the number of shares decreases, but rather slowly. Meanwhile, if the company is a going concern, it grows, and the value of the shares grows with it.

Conceptually, you could get to a situation like Berkshire Hathaway Class A, where a single share is worth $600,000 and what do you do if you want to withdraw $600 worth?

In real life, prior to the institution of fractional share trading, most stocks would split every time the share price got extremely high high. So what would really happen is that if you started with (say) 1,000 shares, continuous sales would whittle that down to, say, 500 shares... but by then the share price would be high enough for a stock split, which would put you back to 1,000 shares.

In real life today, many brokerages let you sell fractional shares, down to 0.001 shares. So that's another point.
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Re: why not dividend stocks instead of Bond Funds?

Post by Dpmbball »

Trapper wrote: Tue Jul 09, 2024 8:24 am Of all my investments, my bond funds have been my biggest disappointment.
I have rotated into money market mutual funds for my fixed income and capital preservation for the past few years.
The yield curve is not inducing me to rotate back into intermediate or long term bond funds with the fingers crossed hope that interest rates will decline.
I do however do not know the future. In anticipation of some decline in interest rates, or inflation staying the same, or heaven forbid increasing I am now cautiously moving some of my money market funds into solid blue chip dividend payers. The equity dividend funds are not attractive to me as the yield is still too low. I also recognize that individual issue higher yields merit caution with risk.
SO.... My choices so far, KHC, XOM, RIO, LYB .... you get the drift.
What are your critical thoughts?
I am a dividend investor by trade or should I say income focused investor look into JEPQ or JEPI…Boggleheads like the equity growth over time low fees and 3-4% drawdown strategy regardless of what ETF yields.

With the ETFs I mentioned you have good yield and lower fees. But they will most likely not grow (can’t predict the future) as well as a total world ETF or S&P 500 ETF.

However, I understand your post and I would shift from individual “blue chip” 3-5% paying stock to ETFs or Closed end funds that have the same or higher yield without the individual business risk also a company is more likely to cut or stop its dividend than a income based ETF or CEF.

At the end of the day I would do both. Invest in S&P 500 index/ETF that historically performs 9% yearly and invest in 5% yield producing securities that perform 3-5% a year.

At the end of the day following the 4% drawdown rule if securities held over a year your taxed 15% and 4% withdraw leaves 5% reinvested. Doesn’t matter too much if there’s 8% growth and 1.5% yield or 4% grown and 5% yield…


Some closed end funds have 8%+ yield with 5%+growth but fees are high and they aren’t mentioned much here.

I would look into JEPQ type securities…To much business risk and dividend stoppage or cut risk with a single company

What matters more than this topic is when to switch to securities or debt instruments with less volatility when nearing retirement but this is a seperate topic
Last edited by Dpmbball on Tue Jul 09, 2024 4:43 pm, edited 1 time in total.
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Re: why not dividend stocks instead of Bond Funds?

Post by KlangFool »

Trapper wrote: Tue Jul 09, 2024 8:24 am
SO.... My choices so far, KHC, XOM, RIO, LYB .... you get the drift.
What are your critical thoughts?
A) Dividend stock are not bond.

B) Dividend stock has the worst of both stock and bond worlds:

i) Higher risk of stock versus bond

ii) Lower return as a dividend stock versus normal stock index fund.

C) I am not disappointed with my bond fund at all. It made me good money from rebalancing in 2020.

D) What did you do in March 2020 and October 2020 in terms of rebalancing?

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Re: why not dividend stocks instead of Bond Funds?

Post by jebmke »

Dpmbball wrote: Tue Jul 09, 2024 4:38 pm
Trapper wrote: Tue Jul 09, 2024 8:24 am Of all my investments, my bond funds have been my biggest disappointment.
I have rotated into money market mutual funds for my fixed income and capital preservation for the past few years.
The yield curve is not inducing me to rotate back into intermediate or long term bond funds with the fingers crossed hope that interest rates will decline.
I do however do not know the future. In anticipation of some decline in interest rates, or inflation staying the same, or heaven forbid increasing I am now cautiously moving some of my money market funds into solid blue chip dividend payers. The equity dividend funds are not attractive to me as the yield is still too low. I also recognize that individual issue higher yields merit caution with risk.
SO.... My choices so far, KHC, XOM, RIO, LYB .... you get the drift.
What are your critical thoughts?
I am a dividend investor by trade or should I say income focused investor look into JEPQ or JEPI…Boggleheads like the equity growth over time low fees and 3-4% drawdown strategy regardless of what ETF yields.

With the ETFs I mentioned you have good yield and lower fees. But they will most likely not grow (can’t predict the future) as well as a total world ETF or S&P 500 ETF.

However, I understand your post and I would shift from individual “blue chip” 3-5% paying stock to ETFs or Closed end funds that have the same or higher yield without the individual business risk also a company is more likely to cut or stop its dividend than a income based ETF or CEF.

At the end of the day I would do both. Invest in S&P 500 index/ETF that historically performs 9% yearly and invest in 5% yield producing securities that perform 3-5% a year.

At the end of the day following the 4% drawdown rule if securities held over a year your taxed 15% and 4% withdraw leaves 5% reinvested. Doesn’t matter too much if there’s 8% growth and 1.5% yield or 4% grown and 5% yield…


Some closed end funds have 8%+ yield with 5%+growth but fees are high and they aren’t mentioned much here.

I would look into JEPQ type securities…To much business risk and dividend stoppage or cut risk with a single company

What matters more than this topic is when to switch to securities or debt instruments with less volatility when nearing retirement but this is a seperate topic
If you sell, you are only taxed on the gain. With Divs, you are taxed on the whole. If you play it right and tax loss harvest, you can go a long time paying zero taxes on gains. I did this from 2008-2018. No longer selling equity now so I’ll never pay CG tax in retirement.
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Re: why not dividend stocks instead of Bond Funds?

Post by Tom_T »

This is where the financial porn sites (you know who they are) lure people in with article titles like "7% Yields For A Comfortable Retirement" and "I'm Adding This 9% Yield To My Retirement Portfolio." Who needs fixed income when you can safely earn much higher yields from dividend stocks? :oops:
TN_Boy
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Re: why not dividend stocks instead of Bond Funds?

Post by TN_Boy »

Trapper wrote: Tue Jul 09, 2024 11:59 am nisiprius asks, "Why would that sentiment not apply to US bonds as well a stocks? "
muffins14 asks, "What is your rationale for thinking the opposite? Looking for more than 2% real return?"

Without touching the third rail of prohibited BH topics I am positioning for the possibility of an environment of higher inflation. (and accompanying higher interest rates).
If it comes, both stocks & bonds will lose value, but I prefer to be heavier on the equity side in this environment.
If current rates stabilize or decline my equity holdings will also be a good place. The risk of bad events will always be present with any individual stock issue. When I think on this, I think of the BP oil spill in the Gulf of Mexico rather than the outright fraud by Enron or AIG and hope I can manage to stay away from such companies.
If you think the current economic and political environment is best dealt with via a higher equity portfolio, sure. I am confused by the reference to replacing bonds with dividend stocks though. Dividend stocks are not bonds, as many people note. The dividends are not guaranteed, unlike bond interest, and stocks are more volatile than bonds.

Bonds look far far better than they did three years ago. TIPs give you a nice real return at the moment. What don't you like about TIPs, if you are concerned about inflation? If you worry about the US government not paying its debts, or the CPI not being "accurate" you can probably say that, but we can't argue about it with you :-) But that viewpoint would be a reason to avoid TIPs. Otherwise, if I was worried about inflation exceeding expectations, I'd have most/all of my bonds in TIPs.
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Re: why not dividend stocks instead of Bond Funds?

Post by Target2019 »

Trapper wrote: Tue Jul 09, 2024 8:24 am Of all my investments, my bond funds have been my biggest disappointment.
I have rotated into money market mutual funds for my fixed income and capital preservation for the past few years.
The yield curve is not inducing me to rotate back into intermediate or long term bond funds with the fingers crossed hope that interest rates will decline.
I do however do not know the future. In anticipation of some decline in interest rates, or inflation staying the same, or heaven forbid increasing I am now cautiously moving some of my money market funds into solid blue chip dividend payers. The equity dividend funds are not attractive to me as the yield is still too low. I also recognize that individual issue higher yields merit caution with risk.
SO.... My choices so far, KHC, XOM, RIO, LYB .... you get the drift.
What are your critical thoughts?
I would simply add to Schwab U.S. Dividend Equity ETF (SCHD) periodically if I felt so strongly about the issue. The top 10 holdings (from 100 companies) are (with % of total assets, not yield):

Cisco Systems, Inc. 4.10%
The Home Depot, Inc. 4.05%
Chevron Corporation: 4.05%
Texas Instruments Incorporated: 4.07%
Amgen Inc. 4.03%
Lockheed Martin Corporation: 4.01%
BlackRock, Inc. 4.01%
Verizon Communications Inc. 3.99%
The Coca-Cola Company: 3.97%
AbbVie Inc. 3.97%

Or you might pick one or both of the Wellington Management funds. Come to think of it, you could forward test several competing solutions (as well as Total Bond fund), and see what happens.
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Re: why not dividend stocks instead of Bond Funds?

Post by Trapper »

Again, as always appreciating the discussion.
Per KlangFool
D) What did you do in March 2020 and October 2020 in terms of rebalancing?
I did nothing, no sales, no buys. One total US bond fund started with $20,000 is at about $18500 with $2250 of invested dividends since opened in October 2019.
The intermediate bond fund I own, has done a bit better and is down about 12% over about the same timeframe.

Jebmke says:
If you sell, you are only taxed on the gain. With Divs, you are taxed on the whole. If you play it right and tax loss harvest, you can go a long time paying zero taxes on gains. I did this from 2008-2018. No longer selling equity now so I’ll never pay CG tax in retirement.
This is an excellent point!

The tax rate on dividends for me lower than money market funds and this makes a difference. While there are more tax efficient strategies, I subscribe that the Gov is going to get some not sweat trying for tax saving perfection.

I have heard mention JEPQ and JEPI and will have to have another look.

Buying SCHD would take the fun out of my hands, but probably be more appropriate overall.
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Re: why not dividend stocks instead of Bond Funds?

Post by KlangFool »

Trapper wrote: Tue Jul 09, 2024 6:39 pm Again, as always appreciating the discussion.
Per KlangFool
D) What did you do in March 2020 and October 2020 in terms of rebalancing?
I did nothing, no sales, no buys. One total US bond fund started with $20,000 is at about $18500 with $2250 of invested dividends since opened in October 2019.
The intermediate bond fund I own, has done a bit better and is down about 12% over about the same timeframe.
.
Trapper,

In summary, you did not "Buy, Hold, and Rebalance". I have no idea what you have been doing.

A) In March 2020, the stock drops 30+% and the bond drop 7%. If you are maintaining your asset allocation, you would sell bond to buy the stock.

B) In October 2020, the stock recovers. If you are maintaining your asset allocation, you would sell stock to buy the bond.

My Asset Allocation is 60/40. 60% stock and 40% bond. To maintain my 60/40 asset allocation, I have to do (A) and (B). You did nothing.

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Re: why not dividend stocks instead of Bond Funds?

Post by Dpmbball »

jebmke wrote: Tue Jul 09, 2024 4:43 pm
Dpmbball wrote: Tue Jul 09, 2024 4:38 pm
Trapper wrote: Tue Jul 09, 2024 8:24 am Of all my investments, my bond funds have been my biggest disappointment.
I have rotated into money market mutual funds for my fixed income and capital preservation for the past few years.
The yield curve is not inducing me to rotate back into intermediate or long term bond funds with the fingers crossed hope that interest rates will decline.
I do however do not know the future. In anticipation of some decline in interest rates, or inflation staying the same, or heaven forbid increasing I am now cautiously moving some of my money market funds into solid blue chip dividend payers. The equity dividend funds are not attractive to me as the yield is still too low. I also recognize that individual issue higher yields merit caution with risk.
SO.... My choices so far, KHC, XOM, RIO, LYB .... you get the drift.
What are your critical thoughts?
I am a dividend investor by trade or should I say income focused investor look into JEPQ or JEPI…Boggleheads like the equity growth over time low fees and 3-4% drawdown strategy regardless of what ETF yields.

With the ETFs I mentioned you have good yield and lower fees. But they will most likely not grow (can’t predict the future) as well as a total world ETF or S&P 500 ETF.

However, I understand your post and I would shift from individual “blue chip” 3-5% paying stock to ETFs or Closed end funds that have the same or higher yield without the individual business risk also a company is more likely to cut or stop its dividend than a income based ETF or CEF.

At the end of the day I would do both. Invest in S&P 500 index/ETF that historically performs 9% yearly and invest in 5% yield producing securities that perform 3-5% a year.

At the end of the day following the 4% drawdown rule if securities held over a year your taxed 15% and 4% withdraw leaves 5% reinvested. Doesn’t matter too much if there’s 8% growth and 1.5% yield or 4% grown and 5% yield…


Some closed end funds have 8%+ yield with 5%+growth but fees are high and they aren’t mentioned much here.

I would look into JEPQ type securities…To much business risk and dividend stoppage or cut risk with a single company

What matters more than this topic is when to switch to securities or debt instruments with less volatility when nearing retirement but this is a seperate topic
If you sell, you are only taxed on the gain. With Divs, you are taxed on the whole. If you play it right and tax loss harvest, you can go a long time paying zero taxes on gains. I did this from 2008-2018. No longer selling equity now so I’ll never pay CG tax in retirement.
I understand that and I guess it’s a good problem to have I don’t have much loss so tax loss harvesting never made it to my practical equation or should I say the gains in the portfolio far outweigh the losses and the losses are dividend paying stocks so with reinvesting and time things turn around but yes I understand the concept and your point. It’s a valid one

It is true you are only taxed on the gain but if you never sell gains and just take principle out then your portfolio was just a savings account in essence…The dividends do force a taxable event that is true and a downside. You can be more strategic with the S&P 500 index/etf with a drawdown strategy that doesn’t forcibly trigger tax event
Target2019
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Re: why not dividend stocks instead of Bond Funds?

Post by Target2019 »

Trapper wrote: Tue Jul 09, 2024 6:39 pm Again, as always appreciating the discussion.
Per KlangFool
D) What did you do in March 2020 and October 2020 in terms of rebalancing?
I did nothing, no sales, no buys. One total US bond fund started with $20,000 is at about $18500 with $2250 of invested dividends since opened in October 2019.
The intermediate bond fund I own, has done a bit better and is down about 12% over about the same timeframe.

Jebmke says:
If you sell, you are only taxed on the gain. With Divs, you are taxed on the whole. If you play it right and tax loss harvest, you can go a long time paying zero taxes on gains. I did this from 2008-2018. No longer selling equity now so I’ll never pay CG tax in retirement.
This is an excellent point!

The tax rate on dividends for me lower than money market funds and this makes a difference. While there are more tax efficient strategies, I subscribe that the Gov is going to get some not sweat trying for tax saving perfection.

I have heard mention JEPQ and JEPI and will have to have another look.

Buying SCHD would take the fun out of my hands, but probably be more appropriate overall.
Well then, we are at the heart of the matter. You want to have fun!

I have *some fun* with a slice of my investments, so why shouldn't you? And hopefully we learn about the pros and cons when we find a shiny thing that turns out to be not a perfect orb of performance. Depending on your abilities and time, you can delve deeper into the investing world. Just a caution, you should dig and dig some more before buying anything. For example, you said you want qualified dividends in your taxable account. That makes sense, just so you understand that your principal is at greater risk with equity ETF's. Also, funds that use options (JEPQ) affect whether dividends are qualified.

The forum's simplest framework is that you and I are better off if we stick to regular investing into broad, passive index funds. I know that to be true for most of us. However, I can afford to have *some fun* and I hope you can too.
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Re: why not dividend stocks instead of Bond Funds?

Post by tennisplyr »

TomatoTomahto wrote: Tue Jul 09, 2024 10:20 am I am amazed at how many BHs can’t seem to resist tinkering based on recent results. I guess things never change.
Perhaps the same reason why some BHs joined this forum, they are petrified of losing their money and will go to great lengths to avoid doing so.
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Re: why not dividend stocks instead of Bond Funds?

Post by z3r0c00l »

Dateline: January 1st, 2014

I have this great blue chip dividend stock for you. It is a brand name so widely known the world over, I don't have to elaborate further: Kodak.
70% Global Stocks / 30% Bonds
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firebirdparts
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Re: why not dividend stocks instead of Bond Funds?

Post by firebirdparts »

After 40 years in a big corporation, I have lost all objectivity about this evidently. It seems like to me that it would be pretty easy to pick a company that's going to pay that dividend. That is not the majority view in this forum, and I think that is for good reason, but at the same time, the executive team is very strongly in disagreement with this forum, and this forum seems not to be much of a threat to corporate governance in the USA or globally. The executive team is in charge of giving away the money and they are highly committed as you've observed over the last 200 years or so.

When you look at a company whose stocks trades at 20X the dividend, you do need to ask yourself why it's not worth more. It should not be difficult to figure that out, though. That's the good news.
This time is the same
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Re: why not dividend stocks instead of Bond Funds?

Post by EricGold »

Trapper wrote: Tue Jul 09, 2024 11:18 am I think I am going to revisit this thread in 3-5 years and see how I made out.
More to the point, let us know how you did after a major downturn
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Re: why not dividend stocks instead of Bond Funds?

Post by BitTooAggressive »

Trapper wrote: Tue Jul 09, 2024 8:24 am Of all my investments, my bond funds have been my biggest disappointment.
I have rotated into money market mutual funds for my fixed income and capital preservation for the past few years.
The yield curve is not inducing me to rotate back into intermediate or long term bond funds with the fingers crossed hope that interest rates will decline.
I do however do not know the future. In anticipation of some decline in interest rates, or inflation staying the same, or heaven forbid increasing I am now cautiously moving some of my money market funds into solid blue chip dividend payers. The equity dividend funds are not attractive to me as the yield is still too low. I also recognize that individual issue higher yields merit caution with risk.
SO.... My choices so far, KHC, XOM, RIO, LYB .... you get the drift.
What are your critical thoughts?
It’s a horrible idea.

Threads like this come along every so often.

Why do you own bonds?
BitTooAggressive
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Re: why not dividend stocks instead of Bond Funds?

Post by BitTooAggressive »

Trapper wrote: Tue Jul 09, 2024 11:18 am Great points being made. Thank you all.
I think I am going to revisit this thread in 3-5 years and see how I made out.
I am bullish on the USA.
I am not confident on how and when interest rates will change.
I know that I do not want to put long term money into intermediate or long bonds at current rates.
Preferring dividend stocks over total return has been debunked many times. It makes no financial sense.

I agree with your reluctance on intermediate and long term US bonds. Long term rates will almost certainly rise as the supply of US government bonds will overwhelm the demand.

Since I personally have a need to protect myself against selling equities in a down market high quality short term nominal bonds or short term tips are what I will choose. Dividend paying stocks is not a substitute.
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Re: why not dividend stocks instead of Bond Funds?

Post by hudson »

Trapper wrote: Tue Jul 09, 2024 8:24 am Of all my investments, my bond funds have been my biggest disappointment.
I have rotated into money market mutual funds for my fixed income and capital preservation for the past few years.
The yield curve is not inducing me to rotate back into intermediate or long term bond funds with the fingers crossed hope that interest rates will decline.
I do however do not know the future. In anticipation of some decline in interest rates, or inflation staying the same, or heaven forbid increasing I am now cautiously moving some of my money market funds into solid blue chip dividend payers. The equity dividend funds are not attractive to me as the yield is still too low. I also recognize that individual issue higher yields merit caution with risk.
SO.... My choices so far, KHC, XOM, RIO, LYB .... you get the drift.
What are your critical thoughts?
If that works, you are golden.

T's and CDs held to maturity deliver as promised to the penny.

Dividend stocks are not as reliable.
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