Finance
THE POINT OF INVESTING IS TO MAKE MONEY by Tom Dupree The Money Man
Last issue I wrote about low interest rates. If you are a saver today, you are having a tough time finding CDs or bonds that yield much in the way of interest. In 1982 that was not the case. U. S. Treasury bonds, municipal bonds, and CDs were all yielding double digit interest rates. Inflation was high, but you were compensated as an investor by high yields on invested cash. The stock market was low and consequently dividend yields on stocks were quite high also.
their dividends in like manner. And so have a handful of other companies. Perhaps what happened from 1982 until recently was like a one-time event. Interest rates were quite high and gave bond investors an incredible ride for years as the rates came down. But that only happened with interest rates going from extremely high to extremely low. That cannot happen again over the next thirty years, because rates are low now. Rarely do I give investment advice, but if you own longer duration bond funds you
At the time, Paul Volcker was the Chairman of the Federal Reserve Bank. He wanted to “break the back” of inflation by driving interest rates high enough to slow the economy way down. He accomplished that. The economy went into a bit of a temporary slowdown, inflation dropped substantially, and interest rates went into a decline that has lasted thirty years. If you had investments in bonds during this time, depending upon the credit rating and maturity, you might have made nice money, because declining interest rates usually cause bond prices to go up, at least for awhile. The problem with bonds is that they mature. They end. The maturity of your bond means they pay your principal back and you have to figure out what to do with it. The same thing happens with bond mutual funds. The bonds in them mature and they have to reinvest the money for their investors. And for the last thirty years it has been a good bet that they were reinvesting the money at a lower rate than it had previously earned. Which means that if you were a bond fund investor you probably saw your dividend slowly decline for the last twenty plus years. On the other hand, if you had been a common stock investor in Procter and Gamble, you have seen your dividends increase for 56 consecutive years! The Nestle Company has increased
might want to look at selling right now. If rates begin the long climb back up, the prices of bond funds will get hammered. Remember, the point of investing is to make money. Do you think you’ll make more money over the next several years by buying stocks which have a long history of raising dividends, or bonds which have a fixed payout that is historically low?
Listen to “The Tom Dupree Show” Saturdays from 6-9 a.m. at News Radio 630WLAP or wlap.com.
MARCH 2013 | TOPS MAGAZINE
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