Dividend Paying Stocks are Not a Substitute for Bonds and Today’s Other Top Stories

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With yields at all time lows, investors have been forced down the credit spectrum in order to find a decent level of return. Often times not being adequately rewarded for the increased risk they’re taking on. This has led some to question the viability of bonds in a portfolio at all, touting the benefits of dividend paying stocks as a substitute.

But Cullen Roche, founder of Orcam Financial Group, LLC, wants to dispel that myth once and for all. “Dividend paying stocks are not a substitute for bonds.” He says.

“A bear market in bonds is nothing like a bear market in stocks. When someone compares the two instruments it means there is a high likelihood that they don’t understand the capital structure very well and haven’t connected all the dots here” says Roche. A fixed income instrument has several embedded safety components that make it entirely different from stocks:

  1. It’s higher in the liquidation chain.
  2. It pays a “fixed income” over the course of its life.
  3. If held to maturity fixed income pays you back at par.
  4. The duration on a fixed income instrument is generally shorter than that of common stock.

Roche then backs up his argument with some data. “Since 1928 the 10 year U.S. Treasury note has been negative in just 14 calendar years. Those negative years averaged a -4.2% return. Stocks, on the other hand, have been negative in 24 of those calendar years and with an average decline of -13.6%. The worst calendar year decline in stocks was -43% while the worst calendar year decline in bonds was -11%.  So it should be clear that a bear market in bonds is very different from a bear market in stocks.”

You can read the full article on Pragmatic Capitalism.


Todays Other Top Stories

Learn Bonds

LearnBonds: – Making sense of the corporate bond market in these amazing times. – This is the third year in a row that corporate bond sales have risen to new record highs through this time of the year. So the supply of corporate bonds is up…and up strongly. What has happened to corporate bond prices?


Municipal Bonds

Janey: – Mid-year municipal market review and outlook. – We recommend investors consider only high quality municipal bonds, especially in the local government sector. Municipals are still an important fixed income option, but credit selection remains increasingly important.

MoneyNews: – Puerto Rico lures Franklin as equity funds buy junk bonds. – Franklin Resources Inc. is leading money managers in adding junk-rated Puerto Rico bonds to mutual funds that focus on equities or other asset classes, even as the island’s main power utility moves to restructure.

Reuben Sushman: – Short high-yield municipal index ETF, an undiscovered value. – An attractive yield, nicely balanced, and a short duration, looks good if rates tick higher.

BondBuyer: – Uptick in current refundings will pique interest. – An expected swell in the volume of current refundings in the fourth quarter may be too little to cure the imbalance that’s left municipal bond investors starved for supply for most of the year.

WSJ: – Fed to consider including municipal bonds in new bank safeguards. – The Federal Reserve, under pressure from lawmakers and state officials, is considering allowing banks to use certain types of municipal debt to satisfy a new postcrisis financing rule, according to a person familiar with the process.


Bond Market

LPL Financial: – Bond yields typically begin to move four to six months ahead of a rate rise. – A steadier rise in interest rates occurs once the first rate hike has passed. With the 2-year Treasury is the most sensitive to rate changes.

Financial Post: – Why the bond market is liquid enough. – The Financial Post takes a weekly look at the tools and strategies that will help make your investment decisions. This week: Liquidity and the bond market.

KathiMerini: – Draghi soothes bond market after summer of strife. – Mario Draghi’s words have lost none of their potency. Just look at the bond market where the European Central Bank president’s hints about further stimulus soothed investors unsettled by turmoil from Ukraine to Iraq.

Every Investor: – Is there a bond market bubble? – High bond prices and low yields are symptomatic of broader problems created by central bank policy.


Treasury Bonds

NASDAQ: – Treasury bonds rise as Ukraine tensions trump U.S. GDP. – Treasury bonds strengthened Thursday as a resurgence of tensions between Ukraine and Russia boosted the demand for haven bonds.


Investment Grade Bonds

Bloomberg: – World’s biggest wealth fund says U.S. corporate debt boom ending. – The head of debt investment at Norway’s $880 billion sovereign wealth fund, the world’s largest, said a rally in U.S. corporate bonds may be coming to an end.

Bloomberg: – Safeway to lead bond flurry topping $100 billion. – The bond market is about to roar back to life after the slowest August in six years. From grocer Safeway Inc. (SWY) to Australian mall owner Westfield Corp. (WFD), companies are poised to fuel debt sales in the U.S. next month that Bank of America Corp. said may exceed $100 billion, keeping the market on pace for a third straight record year.

FT: – Bond bonanza. – Driven by very low deposit rates and low yields on government bonds, investors have been piling into corporate bonds. In the first half of 2014, inflows into bonds totalled some $273bn (£1.64bn) comp­ared with $222.9bn (£134.3bn) into equities, while money market funds, which are a proxy for cash, suffered outflows of $112bn (£67.5bn).


High Yield Bonds

Investment Week: – High yield: Has liquidity risk premium been squeezed out? – (Registration required) High yield investors are not being adequately compensated for liquidity risk, argues David Vickers from Russell Investments.

Essential Binary Options: – Are high-yield bonds too risky? – Like many novice investors, you are probably asking the question, “Are high-yield bonds too risky?”.  It is important to note that increased risk creates the possibility for increased returns and this is certainly true of these bonds. Ultimately, each investor will have to assess his or her own risk tolerance in order to answer this question effectively.  There are, however, a number of important things that people should know about the investments that have earned the unfortunate title of “junk bonds”.


Emerging Markets

Reuters: – Emerging market stock and bond inflows slow in August-IIF. – Emerging markets took in only $9 billion in stock and bond investments in August, below the average for the past three months and lackluster even compared to prior Augusts, a global financial industry group said on Wednesday.

Investment Week: – Is the EM debt opportunity over? – Emerging market debt has been one of the more lively sectors for investors to venture into over the past year, with a sharp sell-off in 2013 preceded by a semi-recovery for the asset class. But are there any opportunities for managers now?


Investment Strategy

MarketWatch: – With bond boom ending, switch into these alternatives. – It’s been a pretty good year for bond investors, considering. Sure, yields are in the cellar, but thanks to a dip in interest rates since January, people have actually made money on bond investments. The thing is, though, bonds aren’t going to be a great investment for long.

Market Realist: – Why bond investors are focusing on credit ratings and quality. – High-yield bond funds have seen some wild swings lately. A record of $7.1 billion was withdrawn in the week ending August 8. In the week ending August 15, some of those flows reversed. Net flows into junk bond funds were positive because overseas risk perceptions receded. Investors also appeared to have oversold the asset class the previous week. They looked to get back into the market at lower valuations.


Bond Funds

Zacks: – 5 Top-rated government bond funds to buy. – We share with you 5 top rated government bond mutual funds. Each has earned a Zacks #1 Rank (Strong Buy) as we expect these mutual funds to outperform their peers in the future.


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