Recently, as the interest rates were growing, Treasuries started paying great interest. They reached 5% recently. And media are now telling us that this is a big threat to the stocks as Treasuries now offer a “virtually risk-free” earnings yield comparable to S&P 500. and if you can get 5% risk-free interest, why would you invest in risky stocks, right?
The way I see it, it is a misleading and utterly wrong argument you should avoid listening to. The bonds (no matter who is the issuer) are no longer risk-free! Even the Treasuries!
You do not have to look too far to see how risky the bonds are. Just look at the bear market of 2022. If you invested in bonds (using TLT, or directly), you lost money. On average, the bonds lost 16% in 2022. How is it risk-free?
The only way how you could make your bonds investment risk-free was if you held them until maturity. If you buy, let’s say a 3-year Treasuries, the only way to make them risk-free is to hold them the entire time. You buy them for $10,000 and if you hold till maturity, you get back $10,000 plus interest, which is currently 4.3%. If you wanted to cash out in 2022, before maturity, you risk that you would be selling for $8,400. Nice loss. That loss will not be compensated by interest at all.
And if you decide to hold until maturity, what can happen in the next 3 years with your bond? Nothing. Absolutely nothing. You put in $10,000 and three years later you get out $10,000. That is a horrible investment!
If you buy a high-quality dividend stock, for example, ABBV, MSFT, AAPL, JNJ, O, MCD, or many other dividend aristocrats, your risk is exactly the same as bonds but unlike bonds, you would make money on the capital appreciation, and received a nice dividend.
Let’s take a look at the “risk-free investment” vs dividend stocks if you bought in 2021, in the midst of the highest market frenzy when everyone was bullish, even your plumber. Here is what would have happened to your $10,000 investment if you bought TLT vs. various dividend-paying stocks in October 2021:
ABBV vs “risk-free” bonds
If you bought ABBV, your average annualized return would be:
With dividends reinvestments:
ABBV 32.37%
TLT -20.83%
Without dividends reinvestments:
ABBV 31.80%
TLT -20.57%
MSFT vs “risk-free” bonds
If you bought MSFT, your average annualized return would be:
With dividends reinvestments:
MSFT -6.97%
TLT -20.83%
Without dividends reinvestments:
MSFT -6.91%
TLT -20.57%
AAPL vs “risk-free” bonds
If you bought AAPL, your average annualized return would be:
With dividends reinvestments:
AAPL 5.65%
TLT -20.83%
Without dividends reinvestments:
AAPL 5.66%
TLT -20.57%
JNJ vs “risk-free” bonds
If you bought JNJ, your average annualized return would be:
With dividends reinvestments:
JNJ 2.86%
TLT -20.83%
Without dividends reinvestments:
JNJ 2.94%
TLT -20.57%
O vs “risk-free” bonds
If you bought O, your average annualized return would be:
With dividends reinvestments:
O 7.07%
TLT -20.83%
Without dividends reinvestments:
O 7.00%
TLT -20.57%
MCD vs “risk-free” bonds
If you bought MCD, your average annualized return would be:
With dividends reinvestments:
MCD 10.14%
TLT -20.83%
Without dividends reinvestments:
MCD 9.98%
TLT -20.57%
You can play with various investments using this calculator and see how you would perform in this market.
Virtually “risk-free” bonds earnings yield is bullshit
Yes, that is the result of today’s market. The bonds may have been a safe haven in the ’30s, ’40s, ’50s, or maybe even in the ’60s, but it is no longer true. Today, they carry the exact same risk as stocks and the bear market of 2022 proved that bonds were riskier than stocks. The only way how you could get your principal back is if you held it until maturity. In a bear market, it would work, but in a bull market, your bonds would provide zero capital appreciation and the yield of 4% is mediocre at best.
Avoid listening to morons claiming otherwise.
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