One of the key questions is what to do with a fixed income portfolio -- either if you rely on fixed income as the whole or part of your portfolio. For those that are looking for income, this is a real concern. Jim Royal of the Motley Fool suggests an alternative to traditional fixed income instruments.
His view is that investors who flee to the safety of bonds when times get tough could be making a big mistake this time. Solid dividend stocks -- including blue chips -- are out performing 10-year U.S. Treasuries. He goes on to say that some of these dividend stalwarts pay higher yields than bonds offer and may provide a better way to navigate these choppy waters.
He points out the problems with bonds and the benefits that blue chip companies have gaining access to low interest rate money. He then goes on to outline his choice of equities to fill this bill.
This is an intriguing approach and worth measuring.
His choices are:
Chimera Investment | |
Exelon Corp | |
Intel Corp | |
Johnson & Johnson | |
National Grid plc | |
Annaly Capital Mgmnt | |
Southern Company |
Summary rationale for the selection:
- Chimera and Annaly Capital give access to real estate trusts which generate income
- Johnson & Johnson and Intel are blue chip equities with strong equity performance that have the legs to last and deliver income
- Southern, Exelon and National Grid have high dividend and sustainable income and key benefits in energy that will continue to have demand no matter what
We will compare these companies with our benchmark set of dividend ETFs that are well diversified.
The benchmark ETFs are:
| Asset | Fund in this portfolio |
|---|---|
| REAL ESTATE | ICF (iShares Cohen & Steers Realty Majors, |
| CASH | CASH |
| FIXED INCOME | TIP (iShares Barclays TIPS Bond, |
| Emerging Market | VWO (Vanguard Emerging Markets Stock ETF, |
| US EQUITY | DVY (iShares Dow Jones Select Dividend Index, |
| US EQUITY | VIG (Vanguard Dividend Appreciation ETF, |
| INTERNATIONAL EQUITY | IDV (iShares Dow Jones Intl Select Div Idx, |
| High Yield Bond | HYG (iShares iBoxx $ High Yield Corporate Bd, |
| INTERNATIONAL BONDS | EMB (iShares JPMorgan USD Emerg Markets Bond, |
- Fools Safer Alternative to Bonds -- Total of $10K invested equally in each stock
- Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes,
- Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes -- funds selected based on price momentum,
Portfolio Performance Comparison
| Portfolio/Fund Name | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|
| P Bond Funds Momentum Based on Upgrading Fixed Income Managers of the Year`s Funds Monthly | 4% | 94% | 11% | 204% | 9% | 155% |
| Retirement Income ETFs Tactical Asset Allocation Moderate | 6% | 80% | 10% | 84% | 10% | 71% |
| Retirement Income ETFs Strategic Asset Allocation Moderate | 4% | 42% | 6% | 23% | 3% | 14% |
| Fools Safer Alternative to Bonds | 13% | 97% | 4% | 14% |
As we are comparing what can be done to better bonds, I have included a comparison with the strategy that selects the best of the best bond managers on a monthly basis to provide context for the best of best bond performance.
Three Month Chart
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One Year Chart
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Three Year Chart
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Five Year Chart
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Performance details of an alternative bond strategy.
The theory of finding an alternative to bonds based on long term dividends is interesting and, perhaps, if you ignore the overall value of the portfolio, it may work. However, this selection has too much volatility. The bond portfolio manages to provide the stability necessary to make this work.
There are a lot of alternatives in the bond world and I would leave my money with the best of bond managers and rely on them to find the best alternative.
Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
