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We continue to examine (part 1) the alternatives for long-term investors in the light of the "new normal" of volatility, low interest rates and inflation. Recently, Morgan Housel of the Motley Fool pushes back on the bond market saying that with low interest rates and continuing inflation, the safety of bonds has to be contrasted with the buying power of what you have left at the end.

His suggestion is high-quality companies like Johnson & Johnson (NYSE:JNJ) , Coca-Cola (NYSE:KO) , and Procter & Gamble (NYSE:PG) have dividend yields significantly higher than the yield on Treasury bonds, have been making dividend payments for decades, and grow their dividends year after year, usually at a rate faster than inflation.

We previously looked at this topic when we compared a number of alternatives and it may be worth repeating the exercise.

I am going to combine the three mentioned above along with one of my favorites - McDonald's (NYSE:MCD) and compare results. The recent turbulence will be an interesting comparison.

Portfolio Performance Comparison

Portfolio/Fund NameYTD
Return
1Yr AR1Yr Sharpe3Yr AR3Yr Sharpe5Yr AR5Yr Sharpe
Best Bond Managers Revised Monthly2%2%51%13%293%9%177%
BND2%7%186%6%160%6%94%
MCD-10%13%149%22%160%15%76%
Four Stocks To Compete With Bonds-4%5%39%15%123%8%41%
JNK2%1%11%15%135%

This shows the spread of returns that you can experience over the long and the short term. The current market turmoil -- the new normal does stress the current accepted wisdom but I think there is a danger of throwing the baby out with the bath water. It seems clear that bonds won't provide the level of income that they once did and it isn't possible to just have a set of bond funds and expect the same level of income. At the same time, stocks are risk-based assets. Take a look at McDonald's with its 10% drop this year after very consistent long-term performance.

Three-Month Chart

One-Year Chart

Three-Year Chart

Five-Year Chart

I don't have any crystal ball and to a certain extent I am feeling my own way. I am very cautiously and slowly moving some of my money out of bonds over into dividend aristocrats to provide income and some growth. Having said that, over the past month, this strategy has resulted in losses. I just have to grit my teeth and get through the turbulence. The only caveat is that if things really do go south, I hope I have the courage to get out into cash and sit it out until things come back.

More data...

Disclaimer: 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.

Source: Why Dividend Stocks Can't Take The Place Of Bonds (II)