Can I replace bonds with Dividen stock mutual fund

[rosiewings]

I'm thinking to use divident stock mutual fund to replace my 25% bond mutual fund. the reat of my invest will be in balance stock mutual fund. any suggestions?

[nix4me]

How old are you?

[retiredjg]

Dividend stocks are NOT a reasonable substitute for bonds. Anybody who suggests that they are is mistaken. Sorry.

If your risk tolerance indicates you need 25% of your portfolio in bonds, you should invest that money in bond funds, individual bonds, CDs, cash, money market or E Bonds or I Bonds.

Using dividend stocks will not stabilize your portfolio. Using "high yield" bonds (junk bonds) will not stabilize your portfolio.

It is just unfortunate that the fixed income assets like bonds are not paying a lot these days. But they can still stabilize your portfolio and that is their primary purpose.

[yules]

I'm thinking to use divident stock mutual fund to replace my 25% bond mutual fund. the reat of my invest will be in balance stock mutual fund. any suggestions?

More information is needed. What would be yout objective for doing so? Tell us that, and then we can tell you whether it is a good idea or not.

Yules

[coachd50]

I'm thinking to use divident stock mutual fund to replace my 25% bond mutual fund. the reat of my invest will be in balance stock mutual fund. any suggestions?

Why do you currently hold 25% of your portfolio in bonds?
I believe that most people who subscribe to that practice do so as a ballast to protect some portfolio value as well as position themselves to rebalance during a market drop. Dividend stocks would most likely not fill the same role.

[nisiprius]

Blue--VYM, Dividend stocks (the Vanguard High Dividend Yield ETF)
Orange--VTI, The stock market as a whole (the Vanguard Total Stock Market Index ETF, VTI)
Green--BND, Investment-grade bonds (the Vanguard Total Bond Market ETF, BND)

Would you say VYM (blue) behaved more like stocks (orange), or more like bonds (green)?

Source



I don't want to give the impression that BND is better than VYM. Over this particular time period BND outperformed VYM but that has been rare over single-year periods, and very rare over longer periods.

The general idea, which I think is valid, is that bonds are expected to have both lower return and lower risk than stocks, and that bonds are likely to hold up through a stock market crash. So, looking at a longer period of time, clearly VYM far outperformed BND:

Source



But let me ask again. Three questions, in fact.

• Did VYM (blue) behave more like stocks (orange) or more like bonds (green)?
• Did VYM provide significant downside protection in 2008-2009 and in early 2020?
• Did BND provide significant downside protection in 2008-2009 and in early 2020?

[dratkinson]

And assuming you were in a high enough tax bracket to benefit from them, you could use a tax-exempt national municipal bond fund... for tax-exempt dividends. A dividend fund can't replace that. Either.

If you need bonds, then you need to buy bonds.


Suggested library books.
--The Bogleheads' Guide to Investing.
--The Only Guide to a Winning Bond Strategy You'll Ever Need, Swedroe.



Welcome.

[rosiewings]

Thank you all for your advice! We are in the high 40s. Currently, we are both employed and have a stable income. We have about $500k sitting in the bank's saving accounts. We haven't invested our money but we realize we should get started now.

We are thinking about keeping $100k as the reserve/emergency fund, that's how we come up with 20%-25% of bonds. We plan to put $300K in mutual fund/stocks. For the rest of $100K+, we plan to get a mortgage to purchase a $350k~$400K rental property. We are looking for growth. We won't need to use the cash at least for 10 years.

Regarding replacing bonds with dividend stock mutual fund, here are our thoughts (don't know if it is right): since we are looking for growth, instead of putting money in bonds, we are thinking to put the money into the dividend stock mutual since dividend stock is considered "Value" investment which provides more stability. We are thinking about putting 25% in "Value" investment and 75% in "Growth" investment.

We don't have much investment experience (except for doing a little bit of investment in 401k). We know there is a lot to learn about investment. However, it will take time before we really have a good understanding. So we come here for help. Please give us advice on how we can get started? How shall we structure our investment portfolio?

As we are approaching retirements, we are getting more anxious when we found out we have no passive income and have to rely on our employment to maintain our living expenses. We feel we need to start investing now. Thanks a lot for your help!

[Brianmcg321]

Stocks are not bonds.

So, no.

[nisiprius]

...we are thinking to put the money into the dividend stock mutual since dividend stock is considered "Value" investment...

If the point is to invest in value stocks, it would be more straightforward to use something like the Vanguard Value Index or some other fund which focusses specifically on value stocks.

...which provides more stability...

But does it? This is similar to a chart I posted before, but this time I will add the Vanguard Value Index fund and the Vanguard Growth Index Fund

Source



During the global financial crisis, starting at the 12/31/2007 and ending at the bottom for stocks,

• The bond fund (yellow) didn't drop at all.
• The total stock market fund (orange) dropped -49%.
• The dividend fund (blue) and the value fund (green) fell more than the stock fund.
• The growth fund fell the least of all the stock funds.
• The simple reality is that none of the stock funds provided any "stability," they all fell about 50%. But in fact the growth fund showed more stability and the value and dividend funds showed less stability.

I know what has been said about dividend and value investing. But it wasn't so during the global financial crisis.

[retiredjg]

Please give us advice on how we can get started? How shall we structure our investment portfolio?

A good place to start is here.

https://www.bogleheads.org/wiki/Getting_started


What do you currently have invested in 401k accounts? Do your current jobs have 401k plans available? Any IRAs or Roth IRAs?

[tibbitts]

I'm thinking to use divident stock mutual fund to replace my 25% bond mutual fund. the reat of my invest will be in balance stock mutual fund. any suggestions?

You can also replace that banana you were going to eat for breakfast with two cupcakes and a side of fries.

[checkyourmath]

Everyone else is doing it! Bonds are like the plague. If we get any type of inflation they essentially worthless. The Federal Reserve is closing in on 10 trillion on the balance sheet when yields rise prices are going to plummet. We have been on a bond bull run for about 40 years with no where to go, so you like everyone else are essentially forced to buy equities. Sorry!

[LeslieSmiley]

the main role/function of FI (Fixed Income) AA (Asset Allocation) which typically is comprised of bond fund/treasury/CD/cash in one's portfolio is not to produce growth, but to produce stability. so when the market drops, the total balance of the portfolio does not drop as much.

so to compare bonds with stock (growth or value or dividend or etc) based on growth is irrelevant as they don't serve the same purpose in a portfolio.

so how much FI allocation should be determined by your risk tolerance which can be measured by something like "one will not panic sell during a market downturn". some people need/want 50% in FI in order to not panic when the market drops 30% in a short time for instance. some people need/want only 10% in FI to feel the same way. it's subjective because it has a lot to do with psychology and it's highly personal based on their personality, background, core value, preference, goals, external circumstances and such.

so if you are having bonds in your FI to stabilize your portfolio, replacing bonds with dividend stock fund will not be a prudent decision. but if you realize that your risk tolerance is actually a lot higher than what you thought, then shifting your AA to one with less FI and more stock assets would make sense providing that you will be able to stay the course and not panic sell during a downturn and that your lifestyle will not be significantly impacted adversely due to the market downturn.

[aristotelian]

Can you? Yes. Many investors are 100% stock. Should you? That depends. You would be increasing your exposure to market risk since dividend stocks are correlated with the market and have just as much risk as growth stocks.

To give you a sense of the risk you are taking, backtesting VYM (High Dividend Yield ETF) vs VTI/BND (Total Stock/Total Bond) since 2007, the volatility of VYM is equivalent to 93/7 portfolio. In other words, VYM is barely reducing your portfolio volatility compared to 100% VTI. VYM itself is 95% correlated with VTI and the two have almost identical -48% max drawdown.

Meanwhile, 60/40 VTI/BND has the same return as VYM but way less volatility.

[pkcrafter]

rosewings wrote:

We are thinking about keeping $100k as the reserve/emergency fund, that's how we come up with 20%-25% of bonds. We plan to put $300K in mutual fund/stocks. For the rest of $100K+, we plan to get a mortgage to purchase a $350k~$400K rental property. We are looking for growth. We won't need to use the cash at least for 10 years.

OK, 100k for an emergency fund--good, but emergency funds are normally cash.

https://www.bogleheads.org/wiki/Emergency_fund

100k for rental purchase.

That leaves 300k for investments.

Rosewings:

I'm thinking to use dividend stock mutual fund to replace my 25% bond mutual fund. the rest of my invest will be in balance stock mutual fund. any suggestions?

This is a little confusing. You say the rest will be in balanced funds. Balanced funds contain stocks and bonds, is that what you meant? In another post you said no bonds, dividend stocks instead.

My suggestion for someone in their 40s who is investing 300k for the first time is:

Create a portfolio of maybe 75% stock and 25% bond. Hold that for a few years and see how comfortable you are with market volatility, then adjust the allocation up or down to control the volatility if necessary. Dividend-paying stocks are not a substitue for bonds.

Paul

[willthrill81]

It sounds to me like this is a classic case of 'reaching for yield'.

You shouldn't own bonds, at least right now, for their expected return, which is negative for the next decade. Rather, you should own them because you want a relatively non-volatile asset class that will serve as ballast to your portfolio when stocks take a big downturn. A dividend tilted mutual fund will not do that.

[dratkinson]

The fastest way to develop your investing game plan is...

1. Do all of your required reading (listed by folks above).

2. After you've done your required reading and know enough to ask questions and understand your answers, then:
--Use the link to "Asking Portfolio Questions" in retiredjg's signature.
--Copy it to your PC.
--Spend a few days editing it with your complete financial information (not just the stuff you think is important, because the other stuff is more important than you know, that's why it's asked for).
--Post your complete information into the bottom of your OP (original post, original poster) by using the Edit button in your OP.

3. New folks joining your topic to help you will find your complete information in your OP (expected courtesy on your part).

4. And you'll know enough (you've done your required reading) to understand your replies.

5. Ask any follow up questions needed to finalize your investing game plan. Then execute your investing game plan. Easy peasy.



Disclosure. I like my bonds. I've used them for their intended purpose: equity risk mitigation, monthly dividends to offset living expenses, last tier of my formal emergency funds, and dry powder. Wish I had more.

I take more risk with bonds to reach for more reward/risk. I like the rewards (monthly dividends) and can tolerate more risk (NAV decline). It required ~5yrs for me to learn that I needed to take more risk with bonds, because safe, low-yield bonds bored me to tears.



The investing game plan the BHs help you create will get your started. But expect to refine your knowledge of investing and your true risk tolerance over the next several years as your gain more experience managing your investments and reading more from the wiki's list of recommended "books" (search term).

[Vanguard Fan 1367]

Since bonds have such a low SEC yield I have a higher percentage of my asset allocation in stocks than if I had my age as my bond percentage. I hope it works out ok.

[burritoLover]

Wow, it seems like there's so many taking on extra risk of stocks because bond yields are low. Can these same people actually tolerate that level of risk? I suspect not and we'll probably see a lot of panic selling at the next crash if bond yields continue to remain low.

[Vanguard Fan 1367]

Wow, it seems like there's so many taking on extra risk of stocks because bond yields are low. Can these same people actually tolerate that level of risk? I suspect not and we'll probably see a lot of panic selling at the next crash if bond yields continue to remain low.

In 1994 I read a Peter Lynch book. He convinced me to buy stocks and to back up the truck and buy more when they went on sale!