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I was just reading an interview with Christine Benz from Morningstar. She recommends also having a portion of your portfolio allocated to bonds and cash. Here is her rationale:
“I can definitely see investors emphasizing dividend-payers in their equity portfolios, maybe going exclusively with dividend-payers, but I would augment them with some safer investments. Coming back to cash, coming back to a little bit in high-quality bonds.
Just food for thought.
I have a substantial dividend-paying position, but it is not in an IRA.
Studies have shown that over the long term dividend paying stocks provide the greatest total return, so it would make sense to have them in your IRA as well. You want stocks in the second quintile of dividend returns – the ones that pay more are mostly very risky.
Nope.
Most of our IRA retirement assets are in Index funds. Either S&P 500 or Total Market.
Obviously, we get slightly below average returns. With which we are comfortable.
Our “emergency” fund is probably too large at
over 15 months normal expenses. But we do sleep well at night.
I read that article and I’ve included a link here. I’m one of those who does as Benz suggests: “I can definitely see investors emphasizing dividend-payers in their equity portfolios….. but I would augment them with some safer investments. Coming back to cash, coming back to a little bit in high-quality bonds. ” I am not an “entirely” dividend investor.
She likes a dividend growth stategy “ Vanguard Dividend Appreciation VIG is a fund that I really like quite a bit. “ She goes on to say ”I would hold kind of a total market index, which is giving me exposure to those types of companies, alongside the dividend strategy.”
VIG is about 80% large caps. An alternative is Vanguard VHYAX which is about 70% large caps. My spouse has both in her portfolio. There are differences in the holdings.
Because I practice what Benz suggests in the article a significant portion of my RMD is generated via dividends and interest. However, I do have exposure to various market sectors as well as foreign, large-, mid- and small-caps. I’m not a fan of the S&P 500 index per se because of some of the companies in that wrapper.
https://www.morningstar.com/retirement/dont-count-dividend-stocks-alone-retirement-income
Basically I am a total returns investor. I do have a fair amount invested in Vanguard Dividend Appreciation, however I’m going to be working towards a three to four fund portfolio over the next couple of years to simplify. Those would be VTI Vanguard Total Stock Market Index, and VXUS Vanguard Total International ETFs, as I like to keep these components separate. For bonds it will be a short term bond, and short term TIPS ETFs.
I have approximately 20% of my equity portfolio in high quality dividend funds. Since I’m not drawing from the portfolio, it’s set up for dividend reinvestment. A lot of people dislike dividend funds. History shows they’re less volatile than other equity classes and act as a quality filter. They also dilute my exposure to the tech sector while still providing growth at a rate that aligns with my investment requirements.
A good thought provoking article. In terms of something I’d characterize as a “safer investment”, I agree with the cash part and I’d somewhat agree with the bonds part if it stipulated only very short term bond funds. But since the ending of what was pretty much a long term bull market in bonds in late 2020, intermediate and long term bond funds have really been a poor investment. Looking at total return charts for 3 major bond funds (BND, TLT, and EDV) show a total return, including dividends, of only 6%, -22%, and -34% respectively for the (almost) 6 year period back to 1/1/2020. Since those are nominal returns and don’t include the additional losses to inflation, the inflation adjusted numbers are even worst. Hence I wouldn’t carte blanche characterize those as “safer investments”. Investing in bonds is like most other investments; you’d better have some idea what you’re doing or you can lose a lot of money. Bond risks exist, but are just quite different from equity investing.
I feel a consumption bond ladder, rather than a bond fund, is a better way to invest in the asset class. It removes interest rate risk from the equation.
I agree, assuming one holds the bond to maturity, the bond issuer doesn’t default, and discounting any long term devaluation due to inflation. However your use of a consumption bond ladder (as a source of dependable income) is quite different from her statement that bonds are someplace to pull cash from in a market downturn. Maybe, but maybe not. Overall though, my comment was really targeted for a less knowledgeable (casual) reader who might mistakenly believe that her phrases like “safe buffer of assets” and “you’re protecting yourself” apply to all bond investments.
A very good and correct distinction. As you say, bond funds can be sensitive to interest rate risk, and all bonds, however held, to inflation risk.