I used to love bonds. Especially government bonds. Guaranteed income, easy liquidity, and stability in a crisis.
What’s not to like?
But my old flame hasn’t done much for me lately. And I’m not the only one.
Bonds have hovered at or below the rate of inflation since 2009:
Just barely keeping up with inflation might be enough, given that I have much riskier positions in stocks, real estate, and tech startups.
But if an investment pays a yield below the rate of inflation, you’re essentially paying someone to hold onto your money. Instead of getting even a modest return, you lose a little of your cash every year, like clockwork.
Today, I own long term treasury bonds and medium term treasury and mortgage bonds. The long term bonds pay 1.73%, and come with a big risk of decline when interest rates increase. Which they’re just about bound to do, given that that they’re are sitting near 0.
The shorter duration bonds pay even less: 1.28%.
What Kind of Return Do We Need to Keep Up With Inflation?
Recent inflation numbers have been scary: over 5% a year. But, if we look at the longer run averages, the picture brightens a little.
Over the last 20 years, inflation has averaged 2.16%. Over the last 10 years, the figure is 1.89%.
I don’t know how long the sudden higher inflation of the last couple of months will last. But it appears that a floor for a return that will keep up for inflation is no less than 2%.
Where Can We Get Our 2%?
The attractive features of government bonds are liquidity, stability, and a modest income. Let’s review a few alternatives, with that in mind:
1) Corporate bonds. Returns aren’t much better than government bonds, at around 1.7%.
2) Fundrise. Love it, but not a good substitute for bonds. Real estate development just isn’t as stable. It’s not very liquid either. However, returns are good. I’ve notched around 7% since I started investing.
3) Single Premium Immediate Annuities. A rather exotic choice. Rates can be good at around 3.5% in some cases. And the income is guaranteed. But they’re not very liquid: there’s a 10% IRS penalty for withdrawal before age 59.5. But if you’re older, they could work well.
4) Dividend Aristocrats. These aren’t just any high dividend stocks. These have a history of paying higher dividends every year for at least 25 years. That’s a surer bet than many stocks with even higher dividends, because those huge payouts may not last.
The yield on some of these large, stable companies is impressive:
Of course, the stock prices could go down.
But if you’re buying for income, and the company is large and stable and has increased its dividend of decades on end, you don’t care. You just collect your check and head to the golf course.
What’s more, you can buy a basket of these stocks, rather than just one, insulating yourself from the chance that one of them cuts its dividend.
Dividend Aristocrats seem like one of the best options to replace the income bonds no longer offer. They are also less likely to fall with higher interest rates.
What do you think the best option is? Leave a comment at the very bottom of the page and let me know! I just might use your idea. 🙂
More on investing:
What Does the Pandemic Mean for Real Estate Investments?
Why I Just Invested in EyeRate, the Best Online Review Tool
What I Learned From an Investor Who Turned $100,000 into $100,000,000
Photo: “Governor Jerome Powell speaks at Brookings panel, ‘Are there structural issues in U.S. bond markets?'” by BrookingsInst is licensed under CC BY-NC-ND 2.0
If you found this post interesting, please share it on Twitter/Reddit/etc. using the buttons at the bottom of the page. This helps more people find the blog!
Save Money on Stuff I Use:
Amazon Business American Express Card
You already shop on Amazon. Why not save $100?
If you’re approved for this card, you get a $100 Amazon gift card. You also get up to 5% back on Amazon and Whole Foods purchases, 2% on restaurants/gas stations/cell phone bills, and 1% everywhere else.
Best of all: No fee!
This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 and returns have been good so far. More on Fundrise in this post.
If you decide to invest in Fundrise, you can use this link to get your management fees waived for 90 days. With their 1% management fee, this could save you $250 on a $100,000 account.
The only place I buy vitamins and supplements. I recently placed an order and received it in less than 48 hours with free shipping! I compared the prices and they were lower than Amazon. I also love how they test a lot of the vitamins so that you know you’re getting what the label says. This isn’t always the case with supplements.
Use this link to save 5%!
My wife and I have gotten organic produce shipped to our house by Misfits for over a year. It’s never once disappointed me. Every fruit and vegetable is super fresh and packed with flavor. I thought radishes were cold, tasteless little lumps at salad bars until I tried theirs! They’re peppery, colorful and crunchy! I wrote a detailed review of Misfits here.
Use this link to sign up and you’ll save $10 on your first order.