Tuesday, October 20, 2015

Investing in 'Safe' Bonds Now Is Neither a Safe nor a Good Long Term Investment Strategy for Individuals --- Unpopular Blue Chip Stocks, Including Energy and Financial Stocks, Are Better Buys for the Long Term

For the first time in decades, blue chip stocks (such as Boeing, Exxon, GE, JP Morgan, Intel, Microsoft, Merck, Pfizer and Wells Fargo) currently pay higher dividends than the interest paid on 'safe' government bonds.

I expect that 'aberration' of premium dividend yields to interest rates to continue to be the case for several more years. In addition, those cash dividends will grow and today's share prices will increase. The interest paid on bonds won't change and at the expiration date of the bonds, no premium will be paid on the principal amount invested.

Bonds aren't a good place for a major portion of the individual's IRA. In fact, individual 401(k) and IRA long term investors should consider a 'no bonds' strategy and substitute blue chip dividend paying and growing stocks for the traditional bond portion going forward.

The popular belief is that bonds are safe long term investments. Everybody knows that. Except that both today and for the foreseeable future, they aren't and won't be.

And in today's low interest rate, weak global economy, and strong dollar scenario, financial stocks and energy stocks are supposed to be poor long term investments. Just like the 'bonds are safe' story, everybody knows that to be the case. But that's not true either.

Long term investors who prefer to buy when good companies are temporarily out of favor and therefore 'on sale' will take a close look at investing for the long haul in out-of-favor companies like Exxon (XOM), Wells Fargo (WFC) and JP Morgan (JPM). They are all great companies that pay solid regular cash dividends which will grow over time. Their share prices are currently 'on sale,' having fallen as energy and financial stocks have declined this year.

But their cash dividend yields are currently higher than the interest rate paid on bonds, and the share prices of these quality companies will almost certainly appreciate over the years, unlike bonds. In fact, bond prices will almost certainly fall as interest rates rise over time.

In short, my considered investment belief is that bonds will be a bad investment for at least the next decade.

And now that the share price levels of quality energy stocks and financials are down significantly this year, they are both good buys for the long haul.

Bond-Market Blues: Where Did My Income Go? is subtitled 'Fixed income market is running dry on a vital attribute: income:'

"If there is one area where low interest rates have propelled growth, it has been in the fixed-income market. But increasingly, income is the one thing that is hard to find.

For investors, that marks a further transformation in the fundamental characteristics of bonds, away from steady income to vehicles for capital gains. What investors should remember: this can also lead to capital losses.

The bond market has boomed in the wake of the financial crisis. Governments led the way, borrowing as budget deficits yawned wide; companies followed, first switching away from fickle bank financing and then lured by historically low rates to add debt to balance sheets.

The Barclays Global Aggregate, a broad investment-grade bond index, now contains over 16,900 securities with a face value of $39.8 trillion, up from $25.3 trillion at the end of 2007.
But low rates mean bonds aren’t throwing off as much cash. . . . Low rates are providing a subsidy of hundreds of billions of dollars from lenders to borrowers. . . .

The problem now is how long ultraloose monetary policy has persisted: more and more low-coupon, long-dated debt has been and is being issued. If interest rates are permanently lower, that will change investor behavior. . . .

Some . . . forecast 10-year U.S. Treasury yields at 1.5% at the end of 2016 . . . . 

Coupon-clipping might not be an exciting investment style, but over time coupon payments—and crucially, their reinvestment—matter. Their diminution distorts the bond market and creates a whole new kind of risk for investors."

Summing Up

Interest rates have been on the decline for more than 30 years.

And while energy prices have been on a roller coaster, they have been falling hard the past year.

Meanwhile, financial stocks are currently priced as if interest rates will never increase.

Thus, my long term investing point of view is that bonds are and will remain bad places to place long term money. On the other hand, blue chip energy and financial stocks will pay good and growing dividends and also show solid share price appreciation over time.

When everybody else is buying bonds for mistaken 'safety' reasons, it's time for long term investors to consider selling.

And when everybody else is selling energy and financial stocks because they have fallen recently, it's time for long term investors to consider buying.

In other words, the best time to buy is when the 'good stuff' is on sale. And blue chip dividend paying and growing stocks represent 'good stuff' to long term investors.

That's my take.

Thanks. Bob.


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