By Aaron D. Schindler CFP, February 2023, @2023All Rights Reserved, aschindler@royalaa.com, Edited by Robert Lovenheim
Most investors might agree that 2022 was a year to forget. Following along with historic precedent, asset prices fell as national banks around the world raised interest rates to tame inflation. While paper losses are difficult to stomach, they aren’t real losses. And, the fall of stock, bond (NASDAQ -33.10%, S&P 500 -19.44%, and the US Bond Index, AGG –13.15%**) and some real estate markets has offered opportunities to increase portfolio income (yield) and potential future equity growth for longer-term investors. It’s time to ask yourself and your advisor the following questions:
- Has the 2022 market dive brought back opportunity to create the traditional 60/40 portfolio allocation where you can invest 60% of your portfolio in stocks and 40% in high-credit government bonds generating almost 5%?
- Do you no longer feel compelled to take excessive equity risk by investing 75% of your portfolio in stocks and only 25% of your allocation in fixed income due to what were historically low bond yields? (Last winter, the U.S. 10-Year Treasury Bond was yielding 1.9%. )***
Headlines News – the U.S. Treasury Bond Yield Curve is Inverted.
Recession Obsession &/or Opportunity?
Some economists are citing the inverted U.S. Treasury Yield Curve as a predictor of a recession. The yield curve measures the interest rates of bonds ranging from one-month to 30-years in maturity as tracked by the U.S. Treasury Department. (A normal yield curve shows an upward graph with interest rates rising as maturity periods lengthen. The chart below shows the current inverted curve with shorter maturities with higher yields.)
While a recession could be on the horizon, the inverted yield curve has offered an opportunity unseen in decades – we are purchasing 6-Month U.S.T-Bills with annualized “Yields-to-Maturity” between 4.5% and 4.8%. Yield-to-Maturity includes interest plus the profit from buying a T-Bill at a discount and receiving its full value at maturity.
Source: https://www.ustreasuryyieldcurve.com
Per the U.S. Department of Treasury’s published daily bond yields per purchasing bonds at par value, the yield on both 20- and 30-Year Bonds is near 4% whereas the yield on the 6-Month T-Bill is more than 4.6%. Why would one purchase a bond of equally high credit with a maturity that’s 19.5 years longer with a lower interest rate?***
When a bond matures, the issuer, such as the U.S. government, is supposed to pay back the lender (bond holder) the par value of the bond. Recall that U.S. Treasuries are considered one of the safest investments in the world per receiving your promised interest payments and getting paid back the full par value of the bond upon maturity. And most U.S. Treasury Bill and Bond interest is exempt from state and local income taxes.
Your Investment Portfolio: Investing in U.S. Treasury Bonds & Dividend-Generating Stocks– Giving You Cows that Give Milk
In “Cows, Bulls and Bears, Oh My! A Dividend Buyer’s Guide to Market Turmoil,” my newsletter of September 7, 2022, I wrote about applying Dividend Portfolio Theory by increasing your overall portfolio yield by purchasing shares of what I believed to be beaten-down stocks of companies generating high dividends ranging from approximately 3.5% to 8% (AMLP, CSCO, DOW, INTC, NYCB, PARA, etc.). I spoke about how dividend-generating stocks have typically increased or cushioned total annual returns.
Dividends & Treasury Yields Can Boost Returns
Historically, dividends (reinvesting them) have made a significant contribution to the performance of the S&P 500. In a Hartford Funds’ 2020 Insight Study entitled The Power of Dividends, Past Present & Future, Hartford Funds and Morningstar stated that from 1930 to 2019, reinvesting dividends on average contributed 42% to the total return of the S&P 500 Index.****
But during the 1940s, 1970s, and 1980s when inflation averaged 5% or higher like today, dividends produced 54% of the S&P 500’s total return. And, per above and your own pockets, we are currently in an inflationary period. *****
Dividends and Treasury Bond Interest: Do You Feel Safer?
Dividend Portfolio Theory can be loosely applied to U.S. Treasury Bonds today in terms of increasing portfolio total return and reducing risk. Combining high-credit bond interest (recall the current almost 5%, 6-month T-Bill Yield-to-Maturity) and equity dividends can allow you to get paid to wait in a down market or even take income without selling shares. Metaphorically, think about cows that might temporarily become skinny, yet still give enough milk to feed a farmer’s family. As stated, this could mean taking advantage of a rare historic opportunity to purchase 6-month to 13-month U.S. Treasuries at a discount and maybe, just maybe, the “break of day”* and the return to the traditional 60/40 portfolio.
What’s Next for You, Your Parents, & Your Kids? Let’s Schedule a Meeting!
A Portfolio Meeting to try to seek opportunities in this market for you or your parents? While we’ve probably already purchased treasuries and dividend-generating stocks for most clients, what about your parents, spouse, and children?
Let’s review all of your accounts, those that I manage and others, as one portfolio to determine, if together, you are achieving your goals. Do you have statements from an old IRA or inherited account that you haven’t reviewed in a year?
And when was the last time you reviewed your life insurance and considered purchasing long-term care insurance to protect your assets and family?
Please email or phone me to schedule an in-person or Zoom meeting at aschindler@royalaa.com or 917-715-2233.