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Don't Buy Bonds Now... Buy These Instead

By Dr. David Eifrig, editor, Retirement Millionaire
Thursday, July 22, 2010

Each year, I sit down and review my mother's retirement portfolio...
Our No. 1 goal: Preserve what she has.
Our No. 2 goal: Pick up a safe yield to pay for her living expenses.
Our No. 3 goal: Find a few safe avenues to grow the portfolio a bit.
For the past 15 months, meeting each goal was easy. All we had to do was buy bonds.
Municipal bonds, corporate bonds, or U.S. Treasury bonds – it hasn't mattered much. Municipal bonds – like the ones I told you about in this essay – have soared in value. Readers of my Retirement Millionaire advisory have also made gains of 34% in several safe corporate bond funds I recommended 12 months ago.
We made big gains buying "boring" bonds because, like most assets, bonds were crushed in late 2008 and early 2009. They've enjoyed a rebound off those panic lows. A special bonus kicker has recently come as interest rates have fallen... which increases the value of bonds issued earlier at higher rates of interest.
This big rally presents a big problem for retirees looking for income. Bonds have increased in value so much, and interest rates have fallen so low, we're simply not able to earn big, safe yields like we did last year. Fortunately, there's a solution...
All you have to do is buy stocks that offer the safety of bonds... and the upside of stocks.
Bond investors demand regular income over a fixed period of time. They also demand their initial investment (called "principal") be returned in full. The problem now is that government bonds yield a measly 3%... and safe corporate bonds yield about 5.5%.
While these yields are better than losing money, I believe investors can do better right now by owning stocks with rich dividend payouts of at least 5%... whose dividends are safe and growing. You can find plenty of these stocks in the drug and utility sectors.
For example, one of my favorite retirement stocks is giant drug maker Eli Lilly (LLY).
Eli Lilly discovered and marketed insulin, which turned diabetes from a fatal disease to a chronic condition. It produced the first drugs for anemia, also once a fatal disease. It was one of the first to mass-produce penicillin. The list goes on and on... a history of big drugs that help a lot of people.
But what sets Lilly apart, in my mind, is the fact that it has paid shareholders a dividend for 125 years and increased it for 42 consecutive years. This is an extraordinary commitment to treating shareholders well. It's a commitment we should all demand of our long-term investments.
Today, Lilly's bonds offer lower yields than the stock. For example, one 16-year bond is paying only 5% a year to maturity. Yet Lilly's stock pays an annual dividend of 5.6% – and growing.
In times when inflation is absent (when prices are either flat or going down, like now), dividends are a crucial tool for building wealth. Getting cash from dividends is the perfect alternative to owning low-yielding bonds during times like these. With more and more cash in your pocket, your net worth grows, especially measured against asset values that are stable or even dropping in price.
Considering how much money we've made with bonds the past year and the fact that interest rates are at all-time lows, it makes sense to consider moving some of your bond money over into companies like Lilly – companies that have safe dividends and are flush with cash and future opportunities.
Plus, by picking safe and secure dividend-paying stocks, you limit your downside... but keep all your upside.

Here's to our health, wealth, and a great retirement,

Dr. David Eifrig

Further Reading:

Tom Dyson has another big-dividend, super-low-risk stock that's perfect for money you're moving out of your bond portfolio. "It performs better than any bank account, CD, or Treasury bond," he writes, "yet its consistent results make it one of the safest places out there." Get the details here: This Almost-Safe-as-a-Bank-Account Investment Pays 5.5%.
When you're looking for more high-income, better-than-bonds stocks, remember this: The best income stocks aren't the ones with the highest current yields. Dan Ferris has done the research, and he just showed DailyWealth readers How to Participate in the World's Best Income Investment Strategy.

Market Notes


Around twice a year, we check in with shares of a small company called Harris & Harris. It lets us monitor one of the biggest potential uptrends in the world: nanotechnology.

Nanotechnology is the science of manipulating matter on an extremely small scale... as small as an atom. It holds the extraordinary promise of turning lumps of coal into diamonds... building tiny machines that can clear out blood vessels... or turning toxic waste spills into pristine lakes. As investment "stories" go, nanotech is about as good as it gets.

Harris & Harris is one of the few pure stock plays on the nanotech story. H&H doesn't make nanowidgets or provide nanoservices. It simply funds start-up nanotech companies. The imaginatively named Nanosys and NanoGram are among its investment holdings. H&H even has the ticker "TINY." Thus, TINY rises and falls with how well the nanotechnology story is translating into real investment gains.
As you can see from today's chart, the nanotech story is in a bear market right now. Harris & Harris is down 31% in the past three months and just struck a new 52-week low. Folks aren't interested in paying up for nanotech innovation these days. We're sure this story will eventually be on the pages of every financial magazine you can think of, but for now, it's rough going for nanotech.

A bear market in nanotech

In The Daily Crux

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