Question:
Dr. Gene was ripping on people who put money in fixed income investments, which are returning less than inflation when an investment in equities pays close to 2%. Although Dr. Gene was just making a point regarding the stupidity of some timid/paranoid/scared investors, if someone was to take him literally, they would dump all their fixed income investments and purchase equities which would pay a higher dividend return. A clarification of Dr Gene’s point would be that he is speaking of the portion of their portfolio after they have met the guidelines of the Ten Year Rule. Unless I am missing the point that fixed income investments are so worthless that the Ten Year Rule should temporarily be scaled back to something less like a five year rule because of the worthlessness of fixed-income investments. I know you would never do away with fixed income investments in their entirety. As far as I know, as a regular listener, you are keeping fixed investments short (two to three year max).
Answer:
We are NOT suggesting people dump their fixed-income investments for dividend paying stocks. As per our Ten Year Rule, money needed within the next 10 years should be in fixed-income investments. However, given the current fixed-income environment, we are keeping investments short with hopes that interest rates will begin to rise. We want investors to hold on to liquidity so they are not forced to sell when the market is down.
Investors who bought 30-year Treasury bonds or 30-year corporate bonds when interest rates were higher lucked out as they have had a good run; however, we would suggest taking your profits now rather than waiting until the bonds mature. We believe interest rates will rise, so we do not think it wise for these investors to take the interest rate risk going forward.
Question:
I am moving towards retirement and re-balancing my portfolio more towards income. What are some good bond funds and dividend stocks at the moment? I am receiving an inheritance, so these are new funds being added to my current mostly stock portfolio.
Answer:
First, we discourage you from investing in bond funds for liquidity needs. We feel only short-term bond funds should be considered, and even then we hesitate. We looked very closely at the investments inside money market funds and discovered they took on considerable risk to yield 0.01%. We would be very concerned about a bond fund that yields more. They likely have a lot of credit risk by investing in junk bonds or they may hold a lot of European debt. We find investors perceive bond funds with a false sense of security. Investors likely wouldn’t seek out Brazilian bonds or junk bonds, but once it is wrapped in a bond fund with a pool of other investors, it is suddenly perceived as safe, and it likely may not be.
Bond funds also have no maturity date, so you do not know what the value of your investment will be worth when you need to sell it. We suggest high quality U.S. Treasury bonds or municipal bonds for your fixed-income portfolio.
However if you are merely looking for income generation with money that is not needed within 10 years, we still suggest dividend paying stocks. A year ago, we were suggesting McDonald’s Corp (NYSE: MCD) that pays 2.8% in dividends, and VF Corp. (NYSE: VFC) paying close to 2.2%. These companies are still paying a dividend, and the value of their stock has risen in the past year.
Leggett & Platt (NYSE: LEG) yields 4.72%; however, it can be a volatile company. We feel the dividend is relatively safe, as the company has been around for more than 100 years. Altria Group (NYSE: MO) yields 5.53% and Total Fina S.A. (NYSE: TOT) yields 6.37%. There are many other good companies with strong dividends to generate income for a portfolio.
Question:
How difficult is it for a nation’s economy to grow, if there is not a growth in population? What causes growth to occur, without adding more people? What countries routinely show good economic growth, without a large growth in population? In economics, I once heard the term “velocity” discussed, but never really hear of it talked about. Is it of any use to economists as a measure of anything?
Answer:
Velocity is a term used to describe the rate at which money is exchanged from one transaction to another. It can help investors gauge how robust the economy is.
As for economic growth, if a country’s gross domestic product (GDP) is increasing along with a population increase, the economy is not really growing. Real growth comes from increased productivity. The person who works for one hour and turns out more goods has more value.
However, we do want a growth in population in both the workforce and marketplace. Younger people are more productive, come with more energy and are more creative. They also buy more, and increase the need for more homes and services.
If we took a perfect world where everyone who wants to work is able to, and unemployment is around 4%, to create growth we merely have to invent something that will make us more productive. This is “creative destruction,” when something new kills something older. An example of this is personal computers. Complex math problems that in the past would have taken a team of accountants weeks to calculate can be done in mere hours now with a computer. It is easy to have economic growth without population growth. Technology and increased education make people more productive and therefore, drive economic growth.
At Henssler Financial we believe you should Live Ready. If you have a question you would like answered, experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or e-mail at experts@henssler.com.
Disclosures:
All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.
