Why would anyone buy bonds or bond funds right now?

[scrabbler1]

To me that declining distributions of my bonds funds has been one of the most troubling aspects of the financial crisis. Fortunately bond were never more than 35% of my portfolio. Still lets look at the distributions of one of Vanguard most popular bond fund Vanguard GNMA (Admiral)

Monthly distributions per share
1/2008 .0454
1/2009 .0414
1/2010 .0254
1/2011 .0302
1/2012 .0288
1/2013 .0203
11/2013 .0233

Multiply by 12 and divide ~$10.50 you can see the yield has dropped tremendously.


So seeing that monthly income has been cut almost in 1/2 since the beginning. I would have to conclude that either the bond funds are pretty small portion of your income, or you had a pretty big cushion.

Wow, that is a pretty steep drop in your monthly dividends per share (DPS). In the big (corporate) bond fund I often refer to (it represents 35% of my overall portfolio and just over half of the taxable subset of it), the monthly DPS was just under 5 cents per share in late 2008 when I first began investing in it. In the 5 years I have been in it, the monthly DPS has dropped to just under 4 cents per share.

However, while the monthly DPS has dropped by about 21%, the number of shares I own has risen by about 28%, so my actual monthly dividend has remained pretty stable (0.79 x 1.28 = 1.01). The added shares came from the excess of monthly dividends over expenses as well as cap gain reinvestments and dividend sweeps from some other funds.

I agree that there has been an erosion of the monthly DPS and I have found it troubling. I own nearly 50,000 shares of my bond fund so even 1/10 of a cent per month translates to about $50 per month.

 

[clifp]

Wow, that is a pretty steep drop in your monthly dividends per share (DPS). In the big (corporate) bond fund I often refer to (it represents 35% of my overall portfolio and just over half of the taxable subset of it), the monthly DPS was just under 5 cents per share in late 2008 when I first began investing in it. In the 5 years I have been in it, the monthly DPS has dropped to just under 4 cents per share.

However, while the monthly DPS has dropped by about 21%, the number of shares I own has risen by about 28%, so my actual monthly dividend has remained pretty stable (0.79 x 1.28 = 1.01). The added shares came from the excess of monthly dividends over expenses as well as cap gain reinvestments and dividend sweeps from some other funds.

I agree that there has been an erosion of the monthly DPS and I have found it troubling. I own nearly 50,000 shares of my bond fund so even 1/10 of a cent per month translates to about $50 per month.

The drop in distribution in the Vanguard GNMA isn't all that unusual in government bond funds.

BND (total bond market index etf)
2009 Distributions $3.1627
2013 $1.8508 (est)

Vanguard Investment Grade intermediate
2009 $.505
2013 $.354

Vanguard Hi Yield
2009 $.430
2013 $.372

It appears that all this QE stuff resulted in a dramatic drops in distributions for the safe government bonds (BND I believe is like 75% government 25% corporate) and smaller drops in corporate and very modest in high yield.

I was measuring the GNMA fund from a longer period Jan 2008 vs the total 2009 income distribution for the other fund.

 

[clifp]

Brewer explained the issue with GNMA better than I can. It was an earlier comment of his that caused me to significantly decrease my holdings (and my mom's much bigger position at one point 1/2 her assets were in Vanguard GNMA.)

The thing is the GNMA is one of Vanguard oldest fund 1980 and we've owned it almost that long. Over the years it provide 50-100 basis higher return than Treasuries and even today the 10 year return of the GNMA exceeds the Total Bond Market.

But I can't think of any advantage of the GNMA over a Pen Fed CD, other than liquidity so I sold today.

 

[scrabbler1]

The drop in distribution in the Vanguard GNMA isn't all that unusual in government bond funds.

BND (total bond market index etf)
2009 Distributions $3.1627
2013 $1.8508 (est)

Vanguard Investment Grade intermediate
2009 $.505
2013 $.354

Vanguard Hi Yield
2009 $.430
2013 $.372

It appears that all this QE stuff resulted in a dramatic drops in distributions for the safe government bonds (BND I believe is like 75% government 25% corporate) and smaller drops in corporate and very modest in high yield.

I was measuring the GNMA fund from a longer period Jan 2008 vs the total 2009 income distribution for the other fund.

One measure I use to figure out the monthly dividend's rate of return is to divide the number of shares I receive or would receive (if I do not reinvest them) by the total number of shares I own. This calculation is clean if I did not make any sales or purchases in the month, otherwise I have to modify it a little bit. I can take that monthly return and annualize it. But what I also do is to multiply 12 consecutive of these monthly rates of return to get an annual rate of return. I maintain a moving 12-month rate of return so I can track it and smooth out any "bumps" from month to month.

Using this meaurement, I have seen the annual dividend rate of return in my home-state muni bond fund also erode in the last few years after being pretty stable from 2004-2011. In the corporate bond fund I described in my previous post, the annual dividend rate of return has dropped from around 7% to 5% in the last few years but most of that is due to the decline and elimination of an annual "spike" in the December monthly dividend in recent years.

 

[John_Q_Public]

Vanguard says to keep your asset allocation by buying when markets are going up, and buy them when going down. Also keep the allocation balanced by selling what is high and then invest into what is low per the contrarian rule. That is a gutsy oxymoron , but it works out with time,...

 

[ESRwannabe]

Most of the developed countries in the world are in population decline. The US has been the one exception, at least up until the great recession. I think the US is barely hanging onto roughly zero growth right now. Most of the developed countries have very high birth rate declines. Even developing countries now have birthrates below the replacement level and will be in population decline.

Anyway, bonds may be a descent investment. Based on the countries that have been going through population decline the longest, the economic affects seems to be deflation or stagnation (which just reinforces the birthrate declines even more).

Japan is a good country to watch to see if they can pull themselves out of this. Their population decline appears to have started after their economic meltdown, and I think they have been caught in a reinforcing loop where more economic deflation/stagnation causes lower birthrates, which then causes more deflation/stagnation...

What I am doing with my own money is trying to invest in companies that will benefit from the wave of artificial intelligence and robotics that is coming down the pipe. IBM and Google would be good examples. We are going to need machines to replace human labor as we have less and less people.

IBM Watson: Final Jeopardy! and the Future of Watson - YouTube

Self-Driving Car Test: Steve Mahan - YouTube

Google's Robot Army: Military or Civilian Purpose? - YouTube