Do bonds offer safe retirement income? Are stocks too risky for retirees? Read this article to learn the truth about what's safe and what's not.
Most people get the same bad advice - "The older you are, the more you should put in bonds. Stocks are too risky." But bonds are more risky now than they've ever been. To understand why, let's start with how bond prices work -
* When interest rates go down, bond prices go up.
* When interest rates go up, bond prices go down.
Bond prices adjust to keep their yields competitive. Someone buying a bond today expects to get today's yield. The only way to adjust the yield of bonds, since their dividends are fixed, is to change their price.
* The longer until a bond matures, the more sensitive its price is to interest rates,
* Because an interest rate change applied over many years has a bigger effect on total return than a brief change.
What's Wrong with Bonds Now
* Interest rates are at historic lows. The Federal Funds Rate is now 0.25%.
* Bond prices are at near historic highs. The Vanguard Total Bond Fund has gone higher than it's been since 1988.
* A recipe for disaster! People wanting retirement income are packing their portfolios with bonds.
Already ultra-low interest rates have nowhere to go but up. And that means...
Already high bond prices have nowhere to go but down.
Yet money has stampeded out of stocks and into bonds.
* Since early 2009, more than $500B poured into bond funds, while $70B pulled out of stock funds.
* You don't want to be part of the herd. Cattle end up at the slaughter-house.
So what can you do for safer retirement income?
How to Use Stocks Now for Safe Retirement Income
Try Dividend Growth Investing.
* Look at stocks that have grown their dividend every year for many years.
* These are often the best run companies. Decades of rising dividends prove their quality. They know how to make more money every year.
Dividend growth stocks share advantages with bonds -
* Unlike earnings, dividends can't be faked or manipulated. They're cash.
* Dividends are safe predictable income. They keep coming no matter what happens to the stock price.
* Dividends tell you your investment strategy is working. You know you've done the right thing every time you cash a dividend check.
* You can collect dividends without putting a lot of time into portfolio management.
There are big extras -
*Beat inflation every year with the great dividend growth stocks. Bond dividends can be eaten up by inflation because they never change.
* Your earnings compound if you re-invest your dividends in stock. Just like a bank account.
* Most long-term stock earnings come from dividends. Stocks returned 6.7% a year after inflation in the 20th century - 2.1% capital gains and 4.6% dividends.
* Make both dividends and capital gains for a great Total Return.
* Don't be fooled - a rising stock price may keep yields looking low - but your Total Return is high.
* Falling prices are a chance to snap up stocks with low prices and high yields.
* Company management works hard to keep dividends growing, unlike unchanging bond dividends.
How You Can Find Dividend Growth Stocks
The S&P 500 Dividend Aristocrats Index lists S&P 500 stocks that increased dividends for at least the last 25 consecutive years - some for much longer than that.
But you wouldn't want to buy all of them. Many things go into a great Dividend Growth Stock -
*Strong cash flows.
* Recurring revenue streams.
* Low production costs.
* Top market share.
* Strong brands.
* Ability to raise prices to keep ahead of inflation.