Growth Bonds
Many of you have learned the disadvantages of bonds: Your yield is locked in for the life of the bond, and when the bond matures you have to reinvest at current yields. In an era of falling rates, that means taking a cut in income.
Wouldn’t you prefer to get steady, reliable income that actually increases most years? I’ve recommended such investments to retirees for years. Venture away from traditional bonds and take a look at stocks that generate income. Ignore the CNBC talking heads who focus on high risk stocks that can rise or fall 20% or more in a week. Income-oriented stocks have more stable values than non-dividend stocks. The dividend payers rise and fall with the general market, but the price swings aren’t as great.
Many income investors avoid stocks because the yields are low compared to bonds, but look at how the income can grow. Vanguard Equity Income focuses on income-paying stocks, and I have recommended it many times over the years. In 1994 the fund earned $0.58 per share in income. At the time the yield was quite high, over 4%. Now the yield is much lower, because the share price is higher. But in 1998 the fund earned $0.64 per share in income. The yield percentage went down, but the cash payout increased. And the fund shares are worth a lot more than in 1994. Did you get that kind of a yield increase with your bonds, money market funds, or CDs?
Since World War II even when the economy is bad or the stock market is falling, corporations maintain or increase their dividends. Corporations cut dividends only when their own businesses are in serious trouble, and a good fund manager can avoid such corporations.
My favorite “growth bonds” right now are real estate investment trusts (REITs). I’ve been pounding the table for them for a few months. They appear to be hitting a bottom right now after a rough 1998. You should add Cohen & Steers Realty Shares and its yield of over 4% to your portfolio right now if you haven’t already. If you want to diversify out of REITs, consider Vanguard Equity Income.
