SWR and dividends

[marko]

This may be off-thread, but...

Anyone care to comment on a guaranteed 4%-8% bond dividend vs AA? I have a good AA but my bond/bond funds have been outplaying my dividend paying equities for so long...

With consistent 5,10 and 15 yr yield averages of ~7% (and a meesly 9% drop in 2008) I'm wondering why not just put the whole basket of eggs into a few of the notable bond funds.

A 7% guarantee or -2% to 13% volatility? I fully appreciate AA, but sometimes a bit of insanity takes hold and gets me wondering!

 

[REWahoo]

It seems banking is something Canada does pretty well.

True - as an insider you would probably know about that better than most.

 

[REWahoo]

This may be off-thread, but...

Anyone care to comment on a guaranteed 4%-8% bond dividend vs AA? I have a good AA but my bond/bond funds have been outplaying my dividend paying equities for so long...

With consistent 5,10 and 15 yr yield averages of ~7% (and a meesly 9% drop in 2008) I'm wondering why not just put the whole basket of eggs into a few of the notable bond funds.

A 7% guarantee or -2% to 13% volatility? I fully appreciate AA, but sometimes a bit of insanity takes hold and gets me wondering!

You might want to do a few FIRECalc runs with a 100% bond allocation and see how that fares vs. having 35% or more in equities. I think what you are seeing is nothing more than recency effect.

 

[marko]

You might want to do a few FIRECalc runs with a 100% bond allocation and see how that fares vs. having 35% or more in equities. I think what you are seeing is nothing more than recency effect.

Good point. That pesky inflation will invariably eat me up without growth even with current yields almost double my SWR

 

[Lsbcal]

...(snip)...
Anyone care to comment on a guaranteed 4%-8% bond dividend vs AA? I have a good AA but my bond/bond funds have been outplaying my dividend paying equities for so long...

With consistent 5,10 and 15 yr yield averages of ~7% (and a meesly 9% drop in 2008) I'm wondering why not just put the whole basket of eggs into a few of the notable bond funds.
...

Are you confusing bond capital gains (due to falling rates) with bond interest (dividends) ? One should probably focus on the SEC yield for the bond funds. A few from Vanguard at present yields:

Intermediate Term Treasury         0.64%
Inflation Protected Securities    -0.70% (yes, it's negative)
Total Bond Market                  1.96%

If rates go up these yields will be reduced. The mirror image of the excellent enhanced returns bond investors have had with declining rates. Then we'll really hear cries of anguish from the FI crowd.

 

[Mulligan]

Are you confusing bond capital gains (due to falling rates) with bond interest (dividends) ? One should probably focus on the SEC yield for the bond funds. A few from Vanguard at present yields:
Intermediate Term Treasury 0.64%
Inflation Protected Securities -0.70% (yes, it's negative)
Total Bond Market 1.96%If rates go up these yields will be reduced. The mirror image of the excellent enhanced returns bond investors have had with declining rates. Then we'll really hear cries of anguish from the FI crowd.

This next 6 month cycle for IBonds could quite possibly be negative which would mean 0% interest for the cycle for me. I don't own inflation securities or TIPs but I am curious, if CPI is negative or flat, does that mean you are outright losing money on your investment since they are currently paying a negative rate?

 

[marko]

Are you confusing bond capital gains (due to falling rates) with bond interest (dividends) ? One should probably focus on the SEC yield for the bond funds. A few from Vanguard at present yields:

Intermediate Term Treasury         0.64%
Inflation Protected Securities    -0.70% (yes, it's negative)
Total Bond Market                  1.96%

If rates go up these yields will be reduced. The mirror image of the excellent enhanced returns bond investors have had with declining rates. Then we'll really hear cries of anguish from the FI crowd.

Looking at total returns for PIMCO 10 year: 7.09 total return, Pioneer 10 year: 8.04 and TRPrice High Yield 10 year: 8.93. TRPice Spectrum Income: 7.12.
Similar total returns for 3, 5 and 15 years.

Granted some of these have higher levels of risk but each has held their price (and yields) fairly steady for over/almost 20 years. All/most of these are within my IRA so cap gains are manageable.

Not included above, but I do track the SEC rates which are slightly lower.

 

[Lsbcal]

Marko, here is what has happened since 2000 to 5 year Treasuries which describes in general the entire intermediate bond market:

So we've had a great ride down in rates with big additions to returns because of price appreciation from declining rates alone.

I own PTTRX (Pimco Total Return) which you mentioned. Yes it has had a good 10 years. But that was the past of fairly high yields and declining rates.

Now notice the rising rate period of Mar 2004 to May 2006 in the chart. During this time 5 yr Treasuries went from 2.8% to 5.0%. PTTRX returned an annualized 2.4% during those 2 years. So although this was not a disaster it was really subpar for the 10 year period. That was starting from a 2.8% yield in 2004, but today's 5 year Treasury yield is only about 0.6%. So if we have an equivalent rising rate period expect it to be worse then 2004.

 

[marko]

Marko, here is what has happened since 2000 to 5 year Treasuries which describes in general the entire intermediate bond market:

So we've had a great ride down in rates with big additions to returns because of price appreciation from declining rates alone.

I own PTTRX (Pimco Total Return) which you mentioned. Yes it has had a good 10 years. But that was the past of fairly high yields and declining rates.

Now notice the rising rate period of Mar 2004 to May 2006 in the chart. During this time 5 yr Treasuries went from 2.8% to 5.0%. PTTRX returned an annualized 2.4% during those 2 years. So although this was not a disaster it was really subpar for the 10 year period. That was starting from a 2.8% yield in 2004, but today's 5 year Treasury yield is only about 0.6%. So if we have an equivalent rising rate period expect it to be worse then 2004.

Thanks for the chart and the insight!

I guess I"m more focused on my high yield funds (PRHYX and RPSIX) which, as corporate bonds are less impacted and the price is not inverse to the yield but more or less follows the market. Almost like a nice dividend paying equity.

The price and yields have been within a nice narrow range since about 1992.

I'm currently using these for income while I wait out a flukey market to spring on equities.

 

[JustCurious]

A 7% guarantee ...

Um, this is not a guarantee. Interest rates have been falling for the last 30 years, and this has given a boost to bond returns. Interest rates are likely to start increasing sometime in the near future, so this is likely to be reversed in the future.