Weekend Reading – Should retirees buy dividend stocks over bonds?
Hey Folks,
Welcome to a new Weekend Reading edition that answers the question: should retirees buy dividend stocks over bonds?
Before that headline article this week here are some recent reads from my site:
As a follow-up to my popular post entitled how long do stock market corrections last I figured it would be nice to highlight the opposite in light of how well things are going for many DIY investors this year: how often and how much do stock markets go up?
And…here are some holiday shopping hacks to consider but potentially a bigger question is how much holiday shopping do you really need to do at all?
Weekend Reading – Should retirees buy dividend stocks over bonds?
Yes!!!
Ha, but I am very biased on this subject because I’ve been investing this way for years now. While I used to have some bonds in my portfolio many, many years ago, I’ve long since dumped all bonds/bond ETFs and instead owned predominantly equities via:
- A basket of Canadian and U.S. stocks for income and growth, along with
- Low-cost equity ETFs for growth.
You can always read what I own and why on these standing pages:
This article from the Globe (subscriber) caught my eye on this subject written by retired, former chief actuary of Morneau Shepell, Fred Vettese.
In the article Vettese compared historical data, using 1999 as a starting point and created a bond portfolio and a stock portfolio. The bond portfolio consisted of $50,000 in long-term Canada bonds which he assumed were bought and held for 25 years. By buying the bonds in 1999, the yield at the time of purchase was over 6% and could be locked-in for the next 25 years. He compared that to the stock portfolio – also starting at $50,000 – which consisted of these three companies: a telecom (BCE), a big five bank (TD) and a popular DIY pipeline stock to own (ENB). Even though these stocks were not “necessarily the best performers in their respective sectors” over time, they did pretty darn good over bonds.
Source: Globe and Mail, author Fred Vettese.
Fred’s summary, which I agree with:
“I would conclude that if your investment horizon is very short and you can’t afford a capital loss, you might simply put all your money into bonds or GICs or maybe T-bills.”
Otherwise, own stocks and/or dividend stocks for the long-run for multi-year success.
Source: A Purple Life.
Are you obsessed with your work? Well, some tips from WSJ Our Life & Work columnist Rachel Feintzeig who signed off from her column recently. Her tips and reminders include (that really resonate with me):
- The people that get ahead are the ones who prioritize the stuff that matters (and don’t care about the stuff that doesn’t).
- Diversify your life. Put time and energy into friends, family, hobbies…it’ll bring perspective.
Source: https://x.com/WSJ/status/1861128334823817248
For fun, or rather for some ridiculousness, U.S. financial guru Suze Orman was on record again to say that $3 million is not enough for any retirement – you might need $10 million or more.
From the article:
“To generate $350,000 annually after taxes without touching your principal, Orman said you’d need a portfolio yielding at least 5%. That means a whopping $10 million in assets, if not more.”
Sigh.
Even if you need to pay for healthcare, sigh…$3 million is a bundle folks.
You need to remind yourself, a. this is someone who is quite sensational who has made a career out of saying some outlandish things, b. she owns a private island and related to that island, she has been quoted as saying c. “I still love saving more than I do spending,” Orman admits, but shared that her biggest expense now that she’s an avid “fisherwoman” is fishing lures.
Yes, fishing lures are her biggest expense.
Thank goodness I run real math for real people who live in the real world. 🙂
I have a free case study below that highlights anyone/any couple that has saved a very healthy $1 million here in Canada inside their RRSPs has done VERY well for themselves and can consider retirement.
Want to your own low-cost retirement income projections?
Just reach out!
Check out my work along with my partner Joe at Cashflows & Portfolios.
My partner and I have been using various retirement projection tools over the years for our personal retirement income journeys and now we’re using these tools to help readers, like you, with your personal retirement projections. We often answer key questions like:
- When do I have enough to retire with my current lifestyle/spending?
- Amongst my pension, RRSPs, TFSAs and taxable accounts which account should I drawdown first and in doing so, what are the taxation implications?
- Should I take CPP or OAS at age 65 or 70?
- And more!
Again, contact us anytime to learn more and get started.
All My Own Advisor readers get an automatic discount on these services. Just ask. That’s it, and you get the discount!!
Other popular real world case studies that don’t include any Suze Orman advice. 🙂
How much do you need to retire on $5,000 per month?
What you need at age 50 to retire on $6,000 per month.
How much more do you need to retire spending $7,000 per month?
Have a great weekend!
Mark
I think the key word in the question “Should retirees buy dividend stocks over bonds?” is “retirees”. The answer, as it often is, is it depends!
– Is the retiree 2 days into their retirement, or are they 20 years in?
– Are their investments and pensions barely sufficient to cover their income needs, or do they have $500K in excess of their needs.
– If the markets crash, and remain flat for the next 10 years, while inflation continues its upward march, can they, or are they prepared to return to work or reduce their living standards and curtail their retirement plans?
S*** happens (the word could be ‘stuff’), and the retiree needs to consider, if it does happen, are they ready. Sure, many, in fact most, have gotten away with it, but some do get caught when that s*** happens to them. This is a true story:
I was in my colleague’s office, it was the mid 1980s, and I noticed a photograph of a yacht with him at the tiller. He was 30 or so years my senior, in his mid-sixties possibly approaching 70. On asking if he still sailed, he shared his story, which I’ll summarize here to: he bet heavily on Rolls-Royce, and they (or that particular division) declared bankruptcy. His retirement savings evaporated, and the boat had to go too. He and his wife were now having to live in a caravan and continue working to keep the money flowing in to pay the 14% mortgage on their house several hundred miles away. Is this a story of “don’t put all your eggs in one basket”, well, yes of course, but what has stayed with me the most is what he said after the story. While looking at the photograph, and hearing his story, I said “at least you have great memories”, he replied “Bob, what matters is now! It’s now that matters.”
So, I have bonds, cash and GICs, and I hate knowing that I’m losing out on skyrocketing gains in equities (I am at about 75/25, so I’m not totally missing out), but remembering what my colleague said tempers my desire to always be reaching for more, because tomorrow will be “now” and I don’t know how today is going to end.
I should add that I also had dividend stock up until yesterday, when I said my final goodbyes to my Canadian telco stock and replaced it with a more dividend-focused Canadian ETF. Thank you, Mark, for bringing to my attention the high concentration of banks in VDY. We hold several ETFs (VCN and ZCN) that are bloated with financials, and VDY would have only compounded the problem.
When considering my fixed income requirement, I only take into account the dividends, and not the stock/ETF’s market value. That sits on the equity side of my 75/25 portfolio.
All good, Bob. I know many DIY investors that hold VDY. It has done well overall but >30% in 3 banks, in one ETF, if that’s what you are going to own, could be risky IMO vs. alternatives like XIU, VCN, ZCN, etc.
IMO, you just need to own one (1) CDN ETF vs. many – so pick from VDY, XIU, VCN, XEI, ZCN, etc. and build the rest of your portfolio from there.
My favourite CDN ETF has always been XIU with good tax efficiecy for taxable accounts (if TFSA, RRSP, etc. are full) and for a blend of income + growth. Everyone is different.
I just happen to have largely unbundled XIU for the last 15 years and instead I own most of the top-XIU holdings directly. I don’t have any intention of changing my approach since beyond 20+ CDN stock, I hold a few U.S. stocks + XAW + QQQ + HEQT, etc. for diversification around those Canadian holdings.
https://www.myownadvisor.ca/have-you-considered-unbundling-your-canadian-etf-for-income/
I think 75/25 mix depending on your investing goals, timeframe, risk tolerance, account structure, income needs, etc. is rather reasonable.
Happy investing!
Mark
I liked your risk-based reply and story. As always, favourite personal finance answer: “it depends” 🙂
With a 75/25 stock and bond mix, yes, you are likely losing out to gains right now but what really matters is your goals, risk tolerance, avoiding tinkering with the portfolio, sleep-at-night factors, etc. Every investor is totally different when it comes to those things. Not right or wrong, just what is.
I suspect when (not if) a market correction happens whereby things are down 10% or 20%, you might feel better knowing more safety is in your portfolio.
Mark
Hi Mark, great thought provoking article as always.
I’m struggling trying to make a decision about selling my BCE. Looks like they will have to cut the div. Wondered if you know if the Ziply purchase is a done deal? Or could they walk away?
Cheers, Alice
Gosh, I wish I knew about Ziply details. I don’t blame you for dumping BCE. Many folks are. My position remains very small now – sold almost all BCE shares a few years ago in all registered accounts.
I recall they’ve signed the deal, but it won’t close until late-2025?
https://www.cbc.ca/news/business/bce-ziply-mlse-1.7374405
“In addition to the purchase price, BCE will assume about $2 billion in net debt as part of the transaction. The acquisition is expected to close in the second half of 2025, subject to customary closing conditions and regulatory approvals.”
Time will tell if BCE can rebound?!
Mark
I never even tried to answer the question given…”Should retirees buy dividend stocks over bonds?”
It is unanswerable (at least reasonably) given no parameters other than “retiree”. As Graham pointed out, there can be numerous wide chasms within the category of “retiree”. A 62 year old retiree might have vastly different circumstances than an 82 year old retiree.
Having said that, I’d support the contention that a retiree might want to *consider* a dividend paying investment over an interest bearing product if it fits their style and situation. YMMV
Yes, Graham had some great points. It depends of course on the person, needs, etc. related to having any fixed income or not. Very individualized stuff.
Mark
I don’t know why anyone still quotes Fred Vettese. He has always been very conservative and stuck in the traditional ways of financial planners.
60/40, 80/20, bonds, cash, who cares? My bond proxies as they say would be utilities like Emera and Fortis. If you build your portfolio while working you have a reasonable long term horizon. All stocks all the time has worked very well and dividends are still increasing faster than I can spend them. No point in getting in long debates over what is better. Keep things simple and carry on.
He certainly seems to contribute to The Globe quite a bit still. Everyone has to stay busy in retirement, Div! 🙂
Yes, I also see like you many Canadian stocks as bond-proxies.
“No point in getting in long debates over what is better. Keep things simple and carry on.”
Awesome.
Curious/question for you: in retirement now are you still maxing out your TFSA(s)? If so, how, i.e., moving non-registered stocks in-kind to TFSAs every year?
Not sure what I might do on that.
Cheers,
Mark
Yes, I am still maximizing TFSA’s. So far have been using additional withdrawals from RRIF’s. We have monthly minimum withdrawals from the RRIF’s with additional dividends from unregistered to cover all expenses. My goal was to deplete the RRIF’s in 10-15 years, but that is not going so well. They are still growing. I think a good problem to have.
Jeepers, I guess so. 🙂
Our goal will be to get rid of all RRSPs/RRIFs by our early 70s and then afterwards, having the following key income streams:
1. Taxable dividend income
2. CPP
3. OAS
4. My small workpace DB penson, and
5. Tax-free TFSA withdrawals, as required.
That should be good 🙂
Continued investing and dividend success to you in 2025.
Mark
Mark, In answer to “should retirees buy dividend tocks over bond?: you said:
“Ha, but I am very biased on this subject because I’ve been investing this way for years now. While I used to have some bonds in my portfolio many, many years ago, I’ve long since dumped all bonds/bond ETFs and instead owned predominantly equities”
You may do this, but you are not a typical retiree. Most people keep working and retire at about 65. The “rules” about a fixed income allocation apply to them. Not 50 somethings who should normally be in their prime accumulation stage.
Retirees without a pension may not be able to stomach a huge drop in the markets. Some would argue that a drop in market value won’t affect their dividend income. Partly true, but then there are many companies that had to cut their dividends. Even utilities like AQN. And perhaps soon another favorite BCE. Others never increase, which after inflation, is almost same as a cut.
When I retired about 20 years ago, I aimed at a 60/40 portfolio. Because of portfolio growth, this trended to ward 70/30. But now, being in my 80s, it is trending back towards 60/40.
The above ratios are Equity/Fixed Income. Fixed income does not equal bonds. Fixed income includes HISAs, GICs, Corporate & government Bonds, Pensions, Annuities and even Preferred Shares.
Regarding preferred shares you can still buy perpetual preferreds from companies with the best credit ratings that have a 6% yield on purchase price that will never stop, unless the shares get called. Market value will fluctuate, but these are not bought to trade.
If fixed income is bought judiciously so that it has an after tax real return that exceeds it’s present value, it provides a buffer in the event of market events that can wipe out any growth you might have in equities It’s hard to recover from those otherwise if you are not earning income from employment. And they DO happen! There are good reasons for those conservative views that some turn their nose up at.
Regarding funding TFSAs. No problem really unless you have decided to collapse your RRSPs/RRIFs. Not something we have done.
Very fair and good comments, Graham.
I am not the typical retiree or semi-retiree I suspect…trying to work part-time in my 50s vs. full-time work.
To your point, an AQN dividend cut stung for me (in 2023) but it was also offset by dividend raises in other parts of my portfolio – so there was no drop in income for us. We’ll see if that happens in the future!?
Even in my 50s, I have some fixed income/cash/cash equivalents like HISAs/ISAs. I sleep better at night with that.
I’ve never been a huge fan of preferreds since the upside is limited.
How are you investing these days? Any major withdrawals planned for 2025 now that you’re into your 80s?
Cheers,
Mark
I like entertainment as much as the next guy but for financial advise Orman + WSJ + X.com are about as useful as injecting yourself with Crack I avoid all 3.
Holding bonds only makes sense short term/situational, I hold some as part of my emergency/cash wedge allocation but they are on steroids yielding ~8%. Based on Vettese’s graph, which I agree is confusing, I compared XEI with XBB on Seeking Alpha looking at 5Y total return (vs Vettese’s price I assume) and 60% vs 2% says it all. The only time XBB won was in 2021 not sure why.
The fixed income space has evolved a lot you can hold equity and receive decent income at the same time. Personally I do not see a use for a traditional 60/40 or 40/60 portfolio they clearly are underperforming as markets go up more than they go down. Dividends stocks beat bonds in most markets and if you want fixed income that is not corelated to equity there are better options vs bonds imo.
Then there is taxation and the fact that with OAS/CPP/DB you, as pointed out, are already heavy on the fixed income side so no real need for retail investors to hold much more. Let’s not forget what inflation does to fixed income vs asset values.
Ben
Thanks, Ben.
I believe there are 3 key reasons to own bonds:
1. Bonds can help your investing behaviour – riding out stock market volatility, if that is needed.
2. Bonds can be used to rebalance your portfolio; keep your portfolio aligned to your investing risk tolerance (e.g., 80/20, 60/40, other). and
3. Bonds can be used for spending purposes – where some fixed income is required/essential for major, upcoming expenses or spending whereby you don’t want to be losing 10% or 20% in a stock market correction.
https://www.myownadvisor.ca/revisiting-the-need-for-bonds/
“I compared XEI with XBB on Seeking Alpha looking at 5Y total return (vs Vettese’s price I assume) and 60% vs 2% says it all.”
Yes, generally, stocks better than bonds long-term.
That said, I do know investors that sleep very well at night since they like bonds and fixed income in their portfolio and always have done so.
I’ve always seen CPP, OAS and any secure, DB pension as a “big bond” for us and I don’t see that view changing.
Any plans for your TFSA investing in 2025?
Always curious what others are doing! 🙂
Mark
Hey Mark,
Fair points psychology matters a lot but data does not lie, To each their own for me I know I’m no good with growth stocks so income investing is a better fit. Like equity bond types vary in risk (short vs long govt vs corporate) so it matters why you hold them and what you are hedging against vs the returns your are looking for. If you only need 6% then get a whole bunch of short term T-bills @4.5% and some dividend players like ENB, T and BNS and you are practically there irrespective of with the market does.
We continue to turn our TFSA’s into cash generators, just shy of $1K pm currently. Take out $$ if/when needed reinvest and compound the rest hopefully at lower prices after Jan 1st. Still reducing single stock holdings (REI/BCE/AQN) in favor of ETF’s like BANK and UTES. Put some funds into SSF.UN to insulate against interest rates and equity risk I look at it as a better then bonds bond like option. Total returns outperform VSB, VAG and VLB by some margin, stable price and a >8% yield so I guess we’ll see how this goes. Also looking at HBIL (short duration T bills with options) similar concept low volatility + high-ish yield of 7.5%. Other then these I have not found many great alternatives to traditional bonds on the Canadian market. The US market is a lot more exiting and is where I spend most of my research time.
Ben
Very nice income, Ben!
Ya, we have banks, utilities inside our TFSAs, one telco (some Telus) and then everything else in XAW for long-term growth.
Posted that here, nice to see other replies too!
https://www.myownadvisor.ca/whats-in-your-tfsa/
To your point, the U.S. market has a bit more going on…so also more challenging to select stocks so I index invest a bit more there.
Happy investing!
Mark
Good Afternoon Mark;
Orman has been in to sensationalism for several years already. She used to have a conference type “special” on PBS from the US (maybe still does) when she was spouting the same tune.
For sure if you are spending more on lures than food then maybe she does need several hundred thou a year for expenses. After all, maintaining a whole island can be expensive as well. It is not “real” life for 95% of people.
Sensationalism is the modeist operandi of quite a few people, Dr. Oz, Dr Phil and now Elon are a few examples.
Unfortunately politicians are gravitating in that direction with catchy phrases and gimmicks to keep our attention.
Finance is beset with the same thinking by some unfortunately.
Real life is balancing the two sides of the equation – money in and money out.
If you got it right you will have more coming in than expenditures. At least until the tax man catches up to you for your LIF/RIF accounts. Hard to beat 20% withdrawal rates. But that is only if you get that old. Maybe you have been wise and maxed out the TFSA and were able to open a non-registered savings/trading account to carry you forward after 90yrs of age.
RICARDO
Yes, I think maintaining an entire island vs. buying fishing lures is likekly expensive.
Big, bold, sensational ways get you places in the good ol’ U.S.A. these days. Pretty sad but true.
“Real life is balancing the two sides of the equation – money in and money out.”
Yup. Get that right and you’re off to the races!
Enjoy the weekend,
Mark
Susan Orman says $3 million in retirement is “far from enough”, you might need $10 million. WOW, what kind of lifestyle does she lead?
Apparently one on a private island. She is very outlandish and quite polarizing but that tends to get you places in the U.S.A these days. 😉
I really don’t follow her at all but I find her claims a form of entertainment and quite laughable – her claims are pretty ridiculous.
Have a great weekend!
Maybe I need more coffee but I really do not comprehend Mr Vettese’s chart. How can a $50K, 25 year bond yielding 6% still be $50K at maturity.
Ya, I can’t speak to his math unfortunately, if correct or not, but I can say based on history that bonds yielding/paying a coupon of 6% over many years should get trounced by a basket of stocks that pay dividends and/or grow their dividends coupled with some stock price appreciation too – so the chart is representative of that which is what I would expect. 🙂
Mark
“I can’t speak to his math”
Me neither.
If I entered the numbers correctly, a simple compound interest calculator reveals a $50K interest bearing product compounded at 6% annually generates a $214,593.54 net worth after 25 years. I acknowledge this does not take taxation into account in any way.
Stumped me. I really have no clue what his point is or why he chose that information to try to reveal it.
But ya, equity investing ought to beat fixed income investing as there is a risk compensation factor expected in taking on, well, higher risk.
My thinking too.
Yupper: “…equity investing ought to beat fixed income investing as there is a risk compensation factor expected in taking on, well, higher risk.”
How is your portfolio doing, Lloyd?
I recall you own XDIV and XEI, along with some smart cash/cash equivalents via TDB8150.
Those iShares ETFs are up quite a bit this year. 🙂
Mark
Overall the portfolio has done exceptionally well. Equities are almost unbelievable. The BAM I bought last November has already started to be used for charitable donating this fall. I wasn’t expecting it so soon but it is what it is and I’ll take advantage of the capital gains whilst they are there.
The GIC renewal rates have obviously plateaued and will likely continue to slowly descend. Not an issue as growth is not their purpose.
Will use up some of the temporarily parked cash in the TDB8150s for the TFSAs. Leaning towards BIP.UN in mine and a coin toss between REI and XEI in the wife’s. Probably change my mind a half dozen times before action though. 🙂
Ha. I hear ya. I’ve been “set” on buying more XAW for TFSAs for 2025 but I am recently leaning on buying a bit of $BN there too.
Hard to go wrong long-term with lots of Canadian dividend payers in XEI.
I did have REI.UN (RioCan) but sold out of that years ago now.
Keep me posted on what you do!
Cheers.
I was thinking exactly the same thing. Perhaps those bonds paid the interest over that time, but their price dropped (as interest rates rise, bond prices fall). So overall total return still about $50K.
Market value stayed the same because the bond prices dropped. What was earned in interest coupon payments lost value as bonds had capital losses. My bond funds pay interest but overall portfolio market value is not rising. Total return is interest + cap loss/ gains
Does that make sense Mark or Lloyd?
That’s my thinking Sil, but I don’t know for sure since few details in the article…but my assumption is because he stated 6% coupons then market value essentially went nowhere.
At the end of the day, stocks and some dividend stocks for the long-run here. 🙂
Mark
Makes no sense if its bought and held to maturity. The ups and downs of bond rates are irrelevant, and the outcome is known if locking in a 25 year bond @6%. Equities will definitely be a beat over that time frame but no where near what the chart shows.
That was my thinking too, thanks very much Deane, but maybe his “Canada bond” is essentially a T-bill here in Canada, re: Government of Canada Bond. If that’s what he means…then it makes sense: guaranteed, fixed level of interest income until maturity, at which time the full face value is repaid ($50k). In this case every penny of principal + then earned interest is guaranteed by the Government of Canada.
In any event, equities for the long-run. LOL.
Good to hear from you.
Mark
The values on the bonds shown don’t make sense then. You cant have a starting value, paying interest of 6% over 25 years thats the same as face value at the end, as Lloyd calculated, tax aside. You would have to be starting with much less than 50k (like a strip bond) or end with much more than than 50k if starting with 50k. TBills are normally short term instruments and are shown in brown as having no growth.
Something seems wrong with that comparison. The ending bond value is crazy low and so is the equity. Is it real returns?
But yes over long periods of time equities historically outperform. My preference is mostly equities with a small mix of FI to cover all the bases and meet my needs.
Ya, again, won’t speculate. I’m letting it go. Ha. 🙂
Still no short-term plan to own bonds for me but never say never I guess…
I just don’t see how they should be part of my plan given I hope to 1. “live off dividends” to some degree (taxable dividends) while 2. while working part-time, and then 3. make some strategic RRSP withdrawals as cash/cash equivalents in that account build up with dividends and distributions paid starting as early as 2025.
We’ll see how my plan works out!?
Mark
Hi Mark,
Thanks for this. A couple points.
1. Tax leakage ìn non registered accounts is huge for bonds vs eligible canadian dividends, of course dependent on one’s marginal tax rate.
2. I view my CPP, OAS and small DB pension as bond proxies. I think you’ve alluded to this in the past.
CJ
Great points. Ya, I do see and have written about CPP, OAS and any secure DB workplace pensions as bond proxies for sure. Many times and I still feel that way.
From my oldie but goodie file in 2012:
https://www.myownadvisor.ca/got-a-defined-benefit-pension-plan-consider-yourself-lucky-then-consider-it-a-big-bond/
While I keep some cash in a taxable account; emergency fund/savings, etc. I’ve never put the bond ETFs I did own years ago in my taxable account. Great point.
How are things in 2024 for investing? Wild year!
Mark