August 23, 2010
Inflation is often the most pressing problem for retirees living on a fixed income. It forces us to divert a potion of the portfolio away from the safety of bonds because we know that without growth the portfolio's purchasing power will slowly decline. Such are the pernicious effects of inflation. A typical retirement for a 62 year old, non-smoking couple is 30 years. Over that period of time prices will typically double. There are good reasons to believe that going forward the heavy hand of government in our national economy could make that worse. For example, the price of a stamp today is $0.44; in 1980 it was $0.15.
Fixed income is just that, fixed. It does not go up in time. In fact, with time it declines in real terms causing the safety of bonds to turn into a sure loser. In my opinion the best alternative available to bonds are high quality, dividend paying companies. Over long periods of time the dividends of our great American and international companies have been the only investment that has consistently bested inflation.
With interest rates so low the relative attractiveness of dividends over bonds is compelling for several reasons. The first is absolute: the yield on the ten-year treasury is about 2.63% while the yield on the S&P 500 index is 3.36%. The second reason is the prospects of the two asset classes. When interest rates rise off their historical lows the price impact on bonds will be negative. Therefore, bond investors have a historically high chance of seeing principal values decline. At least with high quality, dividend paying companies an investor would at least have a chance (a good chance if you ask me) of growing the value while collecting a more generous income. Of course, even high quality dividend paying stocks come with risk of loss. For most investors, a balanced approach is the best approach.
Brennan Redmond
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).