Opinion: This portfolio will earn you twice as much as bonds
Retirees looking to generate passive income from their investments may want to take a look at Europe and Asia, where entire stock markets currently offer returns more than twice that of a portfolio. standard American bond.
The Singapore stock market shows a forward yield of 4%, according to FactSet, which means that an investor is likely to receive around $ 4 in dividends over the next 12 months for every $ 100 invested in the broad index. Australia’s forward yield is 3.8%, Italy and Spain pay 3.7% and the London Stock Exchange 3.3%.
By comparison, the Vanguard Total Bond Market Index Fund VBTLX,
will pay you only 1.4% and the Vanguard Intermediate Corporate Bond Fund VICSX,
just under 2%.
It’s easy to find the standard objections to investing in foreign markets, especially for “security”-conscious retirees. Foreign stock markets are “risky,” according to the standard but vague Wall Street model. Fluctuations in exchange rates can cause your dividends to rise or fall. And companies can cut dividends, while US bond coupons are, in theory, safer.
But none of these really washes. We are not talking about high risk countries. We are talking about highly developed economies with the rule of law and well established and very liquid stock markets. (If you mean “risk,” by the way, the Russian stock market offers a dividend yield of almost 9%.)
As for dividend reductions: they have already happened. The past year has seen huge cuts almost everywhere, due to the Covid crisis. These yields therefore already reflect the cuts.
If the future looks like the past, we can expect an overall increase in dividends in the years to come.
But if you buy a bond paying 1.4%, that’s all you get. Governments and businesses do not increase coupons on existing bonds when conditions improve.
You don’t even have to go to the most volatile industries to find big dividends. In London, a market that I have covered for many years and that I know quite well, the property investment fund British Land BTLCY,
reports 4%, the National Grid NGG utility,
sells 5.6%, and insurance giant Legal & General LGGNY,
more than 7%. These are all considered top notch, widow and orphan type stocks. According to FactSet, major telecommunications stocks in developed markets in Europe and Asia pay an average of 4.8%, utilities 3.9% and real estate investment trusts 4.2%.
It’s easy to forget, in these days of zero interest policy and quantitative easing, that once in retirement people traditionally hoped they could live off their accumulated savings. And they wanted to live off the passive income it generates rather than just spending the principal.
Good luck with that now.
Boston fund manager Jeremy Grantham believes it is the most overvalued bond market in human history. OK, OK, so Grantham’s critics say he’s still dark. But is he wrong about this? For most of the last century, according to data from NYU’s Stern School of Business, an investor in a large basket of high-quality US bonds could generally expect to earn around 2% per annum (or more) at above the rate of inflation. Today, the 10-year US Treasury TMUBMUSD10Y,
Note pays less than half the rate of inflation, and shorter-term bonds even less than that.
Those worried about the “risks” to stock market dividends in Europe and Asia might want to think about the risks for retirees of trying to live with an income that declines in real terms each year.
Yet it is not uncommon to see retiree portfolios invested 70% or more in bonds. May heaven help us.
The question here is not whether high-dividend-paying stocks will end up outperforming the overall stock market over time. The question is whether they will eventually outperform bonds over the course of a 30- or 40-year retirement.
Most of these options are also easily investable from the United States.
There is iShares Singapore ETF EWS,
and Spain ETF EWP,
exchange-traded funds, although they charge a fee of 0.51% per annum. And for other markets, the options are much cheaper. For example, Franklin Templeton offers Australia FLAU,
and FTSE UK FLGB,
funds charging only 0.09% per annum. Vanguard has a VNQI Non-U.S. Global Real Estate ETF,
0.12% load. Meanwhile, many blue-chip international stocks also have US certificates of deposit traded in the US, which means their stocks can be bought easily and inexpensively through any US broker.
Or, you can stick with bonds that make you lose money.