E*Trade’s scanner returns 408 stocks offering a div greater than 8%. So it’s not as if there aren’t a lot of choices that might come with fewer problems than that long-dated AFGC you’re considering. So let’s step back and do some basic review.
What’s a ‘stock’? The conventional answer is that it’s a fractional ownership share of a business. That’s accurate and true. But a better description is that a ‘stock’ is a exchange-traded derivative of an underlying business that often has a very tangential relationship to that business, otherwise, why the frequent and often huge diff between what it might cost to own the whole business versus its supposed “market capitalization”?
Said another way, the price of those exchange-traded fractional ownership shares often diverges widely and wildly from things like the company’s book value or its future earnings prospects, and when sanity returns to the market place, the price of the derivative can plunge, or worse, the business can fail and drag the price of its stock down with it. Thus, over time, the price of a stock can vary widely, and it can go to zero.
What’s a ‘bond’? (For now, set aside the time differences between bills, notes, bonds, and the credit structure differences like senior, junior, and subordinated.) A bond is a loan that pays the lender a fee, and it generally sets a fixed date for the return of principal. Said anther way, most bonds pay interest, and they make a promise that they will mature, but often enough they fail on that promise and they default. Thus, as with stocks, bonds don’t come with iron-clad, unbreakable promises that they will retain their value. They generally do. But often enough to be worrisome, they do default.
Many stocks also make interest payments to their owners, i.e., pay dividends, but they never mature. What stocks do far better than bonds, however, is incorporate inflation into their price. Thus, if one had to choose between a bond offering a current yield of 7% and a stock offering a current yield of 7%, and one intends a long holding-period, the conventionally more assured bet is to own the bond but the paradoxically safer bet is to own the stock, because its eventual cash-out value is likely to be far higher in terms of future purchasing-power than that of the bond.
The conventional “wisdom” concerning retirement planning is this: build wealth during one’s working years and spend down that wealth during one’s retirement years. But I regard that advice as nonsense. Why shouldn’t one’s portfolio keep growing? By the time one retires, he or she has been in the investing/trading game for as much as 30 to 40 years. Why abandoned those hard-learned skills? Why not use them to create a current income stream sufficient to meet one’s current expenses as well as keep growing the portfolio enough to overcome the erosions of inflation, plus deal with life’s inevitable, financially adverse surprises?
And here I’m citing my own experience. Since retiring 20 years ago, my portfolio --exclusive of a paid-for house-- has grown just over 3x. That’s not huge growth. But it does create a financial buffer that lets me sleep at night. If inflation persists, as it is likely to do, or if taxes go higher, as they are likely to do, or if my expenses increase, as they might, my beer-and-bait life style can continue without worry and without interruption. Meanwhile, I’ve got an interesting and engaging hobby, which is trying to figure out ways to pull more money out of markets than I bring to them.
For sure, each person has to make his or her decisions about how to live and how --or whether-- to invest both before they retire and afterwards. Me? I bought my first stock when I was ten, doubled my money on it, and thought investing was easy, a bit of foolishness it took many decades to unlearn. So I’m still in the game, still exploring, still learning, and still having a bit of fun, and mostly on the other guy’s nickel.
