Having seen rates rise for years, it was a bit scary to buy long-term debt for fear of significant price declines should rates rise so few received the higher interest payments for long.

We don’t need a high tax, high inflation environment for “just living off interest” to not work very well either. In early 2000 one could get 6 percent from a money market fund. By 2003, .6 percent was common. A 90 percent decline in spendable cash is not what one would expect from a “conservative” strategy.

Anyone trying this over the last couple of decades has not fared well or, has been flirting with disaster chasing yields. Which brings me to…

High Yield Is Better Than Low Yield

Well duh. How can 5 percent interest not be better than 1 percent? Simple. 5 percent is riskier than 1 percent, even if you cannot see why it is riskier.

One of the worst years for long-term treasuries that I’ve seen in my career was 1994. The pristine credit quality of the U.S. Government didn’t keep long-bond prices from sinking over 20 percent. So much for preserving principal through conservative investments.

2008 highlighted the importance of credit quality. Treasuries held their value and made a little money during that crisis while lesser credits got hammered. For instance, JNK, a popular ETF tracking high-yield bonds, started 2008 at $46.75. By November 1st, it was trading at $28.39 according to Yahoo! Finance. The fund sits at just under $36 today and has yet to crack $42 let alone get back to that 2008 starting price. Instead of bonds providing stability when stability was needed the most, high-yield bonds dropped over 39 percent.  

Yes, it has made higher interest payments but retirees attracted to JNK for higher interest payments have had poor price stability. That does not jibe with what clients are looking for when they want to just live off interest. Whether we are talking about term risk or credit quality, a high yield should be viewed as a threat to principal rather than an opportunity for most clients.

Dividends Are Income

Dividends feel like income. You get a check or interest payment like a CD or a bond after all. But “like” isn’t the same as “same.”