Moreover, some balanced funds have performed surprisingly over the last ten years, which earned the sobriquet "the Lost Decade." For example, the Vanguard Wellington Fund returned 5.91% annually for the ten years ending on August 31.
Seven years ago, I had the opportunity to see the late Peter Bernstein speak to a group of financial advisors at a JP Morgan Fleming conference outside of Chicago. Bernstein, who led a remarkable life as an asset manager, financial advisor, author and editor, described himself as a "social worker to the rich."
After stints in the Office of Strategic Services (the predecessor to the CIA), at Williams College teaching economics and in commercial banking, he became a financial advisor and money manager in 1951, taking over his late father's firm, Bernstein-MacCauley. It was a period with some interesting parallels to the present.
The post-World War II environment was characterized by high unemployment as the economy struggled to absorb millions of decommissioned soldiers returning home (the G.I. Bill helped cushion the blow). Partisan bickering rivaled the present decibel level and voters relished tossing out incumbents in both parties during the late 1940s.
Bernstein quickly discovered that many of the firm's wealthy clients owned equities for the dividends, not because they expected any significant price appreciation. For several decades in the wake of the crash and the Great Depression, stock yields topped bonds.
It was during a powerful rally in 1958 when equity yields finally slipped below fixed-income securities-and stayed there for 50 years. During the go-go years of the 1960s investors became infatuated with growth stocks. Wall Street Week host Louis Rukeyser liked to cite the remark of his father, Merryle, a famous financial writer, that it was late in life before he realized a "stock that paid a good dividend could also go up."
Interest in dividends continued to wane in the stagflation-prone 1970s, when bond yields soared and hard assets appreciated. The lone bright spot of equities were small-cap stocks, which enjoyed their own private bull market as blue chip shares treaded water. Companies themselves accorded little respect to dividends, and payout ratios for the Standard & Poor's 500 index fell from 60% in the early 1970s to 30% by 1999. Soaring equity prices, of course, also contributed to lower yields.
Dan Fuss, vice chairman of Loomis Sayles and co-manager of several of its bond funds, considers it excessive when the conversation urges investors to avoid equities for all but a small sliver of their portfolios. This is one of those rare times since 1958-the other being early 2009-when many stocks are yielding more than bonds.
One can even find individual companies with long histories of increasing dividends and virtually identical stock and bond yields. "All it takes is one dividend increase and the company's stock will yield more than its bonds," Fuss notes. "There are several good strong companies with little debt, strong market shares, that yield 3% or 4% that would normally sell at yields of closer to 1%."
Still, Fuss says there is "no one-size-fits-all" solution for retirees. He has a neighbor in his mid-80s who is almost "all equities," and Fuss suggested he might want to dial it back somewhat. Conversely, going down to 10% equities at this point in time makes little sense unless "you have a very short time horizon," he says. "The problem today is there are more bargains in [stocks] that grow dividends than there are in long-term bonds."