Yields

[Chuckanut]

One thing we who are about to retire or have already retired are interested in is yields on our investments.

Since the Fed has decided to keep interest very, very, very low for the next two years, we, who depend on that interest to pay our bills, have a problem.

I put together a list of what several funds I am interested in are yielding as of this morning.

Vanguard Federal MM 0.01%
Vanguard Wellesly 3.32%
Vanguard GNMA 3.26%
Vanguard Short Term Investors 1.63%
Vanguard Total Stock Mrkt Idx 1.85%
Vanguard SP 500 Idx 1.89%

My Credit Union
6 months 0.40%
1 Year 1.46%
2 Years 0.75% Yes, less than the one year rate!

Current CPI - 3.6%

As we can see, only the 1 year CD rate comes close to the bond mutual fund rates. Keep in mind price risk for the funds.

None of these yields equals the CPI!! Only the GNMA and Wellesly funds comes close and they still fall short.

The yield on the two stock market index funds beats the money market fund, the short term investment grade fund and all of the CD rates. Again, with price risk!

 

[FIREd]

The good news is that CPI has started to cool down over the past few months. The economy is slowing down, oil prices are falling, and deflation is becoming a concern again, so CPI might continue its downward trajectory for a while.

Also, the recent market sell-off offers some opportunity to buy equities with a decent yield.

 

[Alan]

Yes, it is sorry viewing looking at the yields. As well as the funds you mention, we also have investments in the following:

Fido Total Bond 2.91%
VG TGT 2010 2.37%
I-Bonds 4.6% - 6.03% (We have ~$150k, started collecting them in 2003, wish I had started earlier)

 

[clifp]

5% Penfed 10 year CDs. Just wish I had bought more this last Jan.

 

[Chuckanut]

I do have one TIP bond. That appears to be the only thing whose yield is keeping up with inflation.

 

[Koolau]

Yes, it is sorry viewing looking at the yields. As well as the funds you mention, we also have investments in the following:

Fido Total Bond 2.91%
VG TGT 2010 2.37%
I-Bonds 4.6% - 6.03% (We have ~$150k, started collecting them in 2003, wish I had started earlier)

If you are interested in I-bonds, I started a thread regarding the current anomaly of 6 months interest at 4.66%. Google this or search the boards if you are interested. Many caveats, as always. And, as always, YMMV.

 

[Chuckanut]

Koolau,

I just looked at I-bonds. they are paying an excellent rate at this time. However, for new bonds the fixed rate is 0%, that's right ZERO PERCENT! One only gets the inflation rate. After paying taxes on redeption, one falls behind inflation - again. Still they are better than CD's assuming rates stay this low. Also, one can only buy $5000 a year per SS number, so they will have a limited effect on one's investment portfolio. Too bad.

 

[Dawg52]

5% Penfed 10 year CDs. Just wish I had bought more this last Jan.

Same here. But I'm kicking my a$$ even more for going with a 5 year duration on 6% yielding PF CD's a few years ago. Could have locked in for 7 and they are about to mature.

 

[Alan]

Koolau,

I just looked at I-bonds. they are paying an excellent rate at this time. However, for new bonds the fixed rate is 0%, that's right ZERO PERCENT! One only gets the inflation rate. After paying taxes on redeption, one falls behind inflation - again. Still they are better than CD's assuming rates stay this low. Also, one can only buy $5000 a year per SS number, so they will have a limited effect on one's investment portfolio. Too bad.

Even so, I still bought $10k this year yielding 4.6%. If inflation goes to zero and they reset to 0%, then I can sell them after 12 months and lose the last 3 months of interest (at 0%) so the overall yield in those 12 months is still a lot better than a 1 year CD.

 

[FIREd]

Currently my fixed income portfolio consists of:

CDs: paying 4.6% average until at least 2017
i-bonds: paying 4.6%-5.3% currently
Municipal bonds: 3.6% average, tax free
TIPS: paying 2.1% real average

My stock portfolio has a yield of 3.2%.

 

[Chuckanut]

@ Alan,

Good point. The current CD yields are so lousy that even a 0% base rate on i-bonds makes them look better than CD's.

 

[Nords]

The yield on the two stock market index funds beats the money market fund, the short term investment grade fund and all of the CD rates. Again, with price risk!

I think you're affirming that the only long-term way to beat inflation is to invest in equities.

You could try a dividend fund like the Dow Dividend ETF (DVY). If you're holding shares for the dividends then you could not worry about price risk.

 

[TN_INVEST]

I think you're affirming that the only long-term way to beat inflation is to invest in equities.

You could try a dividend fund like the Dow Dividend ETF (DVY). If you're holding shares for the dividends then you could not worry about price risk.

Long term, equities outpace other investments to the tune of about 4 to 1 when adjusted for inflation.

Total Return - inflation = inflation adjusted return.

Regarding the Dow Dividend ETF. You could do a lot worse, but I'd rather pick my own dividend paying stocks. I think Jeremy Siegel did some work that indicated the S&P and Dow Jones folks don't always do a good job of selecting which stocks to add or subtract from their indexes

I remember the changes in the late 90s with the adding of MSFT, INTC & HD. I'm pretty sure the companies they removed from the Dow proceeded to do a lot better than the ones they added.

 

[GLM]

To get 10K in I Bonds

FYI -
for the rest of 2011 you can still buy paper I Bonds locally - still with the 5K limit per social security number . You can, this year also buy another 5k via Treasury Direct online . Buy them near the end of the month (via online a few days before ) - interest posts at the first day of the month.

 

[chinaco]

For inflation... looking at the CPI-U... if one include energy and food, that is about what the Treasury is rate is on a 30 year bond (latest auction rate was 3.75%). CPI-U was 3.6% in June (including fuel and food).

http://www.bls.gov/news.release/pdf/cpi.pdf

If you strip out food and energy, the CPI-U in June was 1.6%. 5 year treasury notes auctioned with a rate of 1.5% on 8/1/2011.

10 year notes had a rate of 2.125%. 10 year TIPS have a real rate of 0.625%.

Recent Note, Bond, and TIPS Auction Results

So you could lock up money for 5 years and lose ground based on the information at hand.

5 years CD rate I have seen are competitive with the 10 yr fixed Treasury notes.

Ally has a 5 year CD with a rate of 2.23% with something like a 60 day interest penalty for early withdrawal. And of course a guaranteed of no loss of principle or interest (similar to a treasury).

High Yield CDs - Rates: Online High Interest CD Rates | Ally Financial

High Yield CDs - FAQs: Online High Yield CD Bank Accounts | Ally Financial


It makes me wonder if I am looking at the wrong data or interpreting it wrong....

What do you see? Am I looking at this correctly?

 

[Rich]

A little over a year ago I started buying solid dividend stocks (Duke, Johnson and Johnson, Verizon, ATT, Exxon, that sort of quality stock). My average dividend (which I'm reinvesting into the various stocks in the portfolio) is 4.5%. I'm also pleased that the wild gyrations of these past few days has had remarkably little affect on the total value of my portfolio.

I avoided the temptation to purchase high % return stocks (in some forums folks are talking about 8%~12% returns on the stocks they invested in!), as I wanted the stability of the blue-chip stocks I picked.

Rich

 

[TN_INVEST]

My average dividend (which I'm reinvesting into the various stocks in the portfolio) is 4.5%.
Rich

I too love me some dividends.

Sounds like you have a nice payout rate, and I suspect you've actually seen your income increase due to rising dividends.

 

[Lsbcal]

One thing we who are about to retire or have already retired are interested in is yields on our investments.
...
None of these yields equals the CPI!! Only the GNMA and Wellesly funds comes close and they still fall short.

The yield on the two stock market index funds beats the money market fund, the short term investment grade fund and all of the CD rates. Again, with price risk!

As you've mentioned the Fed is holding the short term rates down and will probably do so for a long while. The bias will be to get growth going and this favors equities over FI. So the bias is to favor risk takers and if you don't take those risks with your investments you are asking for just preserving your principle with maybe some erosion due to inflation. There have been other times in our history where real FI rates were low to negative so this is nothing new. Part of the Fed's mandate is about employment.

I'm guessing that growth stocks will be favored in the future. Small and midcap growth have outperformed their value counterparts for quite awhile. For example, through July the 12mo returns were 32% and 18% for Vanguard Midcap Growth and Midcap Value respectively.

 

[TromboneAl]

Isn't it interesting to know for a virtual certainty what bond rates will be until mid-2013? How often does that happen?

Or perhaps it's not totally certain.

 

[Lsbcal]

I'm sure the Fed will move rates up if it's required. They only control the short end of the maturities. So the market may force longer term rates higher if conditions change dramatically.

 

[DblDoc]

Looks like they are indirectly control the long rates too. Poor short term yields are forcing investors out on the longer end of the curve and driving yields down. Fed's Easy Policy Confines Treasurys Rally To Long End - WSJ.com

They either continue buying short-term debt and earn next-to-nothing, or they take the risk of locking themselves into a prolonged period of holding U.S. paper to earn a bit more. Investors are still cautious as they transition into the latter.

DD

 

[Gone4Good]

I just looked at I-bonds. they are paying an excellent rate at this time. However, for new bonds the fixed rate is 0%, that's right ZERO PERCENT! One only gets the inflation rate.

Zero Percent real is actually a smashing good deal right now. In the TIPS market real yields are negative out to ten year maturities. The real yield on nominal bonds is also expected to be negative.

The huge problem with I-Bonds is the investment limit. If that cap were lifted, I-Bond 0% real yields would be 'back-the-truck-up' attractive compared to the rest of the fixed income market.

 

[Lsbcal]

Those lousy real yields are telling us it pays to take some risks now.

SP500 PE=14.1 trailing and PE=11.9 estimated. Throw in a 2.2% dividend yield which is very close to the 10 year Treasury, and stocks look very good right now.

 

[Ed_The_Gypsy]

Relax. We are on the way to deflation. Depression follows.

The Fed is out of ammunition, no matter what Bernanke says. What can they do after interest rates are zero? Banks are not lending. Businesses are not investing. People are not buying. This is not good, people.

IMHO the past few Chairmen of the Fed should be considered criminals.

 

[Purron]

Article from the WSJ from last April. Low interest rates force many retirees to take on more risk than they're comfortable with. Doesn't look this this will change anytime soon.

Fed's Low Interest Rates Crack Retirees' Nest Eggs - WSJ.com

John Lehman, a 70-year-old former hardware entrepreneur who lives on the other side of the golf course from Mr. Cohen, has less sympathy for what he calls "those idiots in Washington, D.C." He says he's keeping about 80% of his considerable investments in stocks, despite the shock he suffered during the financial crisis. He hopes his returns in equities will allow him to live without dipping into his capital.

"That's why most of us are in the stock market, because there's no place else to go," he says, noting that he would happily move into safer CDs if he could get a better rate. "I hope my assets don't run out before I die."

Mr. Lehman's taste for stocks goes against the traditional advice of financial planners, who urge older Americans to keep a majority of their assets in relatively safe, fixed-income investments. But more retirees are getting into riskier positions as they try to avoid running out of money, says Neil Kasanofksy, a financial adviser in Port Charlotte who has a largely elderly clientele.