I am a begrudging buyer of bonds and fixed income. Yes, I need them for asset allocation and diversification but I really dislike buying them for several reasons: (i) their payments are tax inefficient; (ii) their face value is affected, relatively speaking, to macro-economic factors more than stock; (iii) with a long investing horizon (20+ years), you can get better return from stocks; and (iv) unless they are government issued bonds, there is no guarantee of payment- see ABCP (the term fixed income is a bit of a misnomer).  But, alas, they are like carrots to me. I don’t like them but I make them part of my diet.

Outside my retirement account, I am building a dividend fund- a fund that pays lots and lots of dividend (one hopes) and I have debated the relative merits of even buying any fixed income instruments in this fund. Thus far, I have decided to forgo such instruments (by way of background, I do have an emergency fund in a high-interest account which is yielding GIC like rates) and I have been playing with the concept of anchoring this dividend fund with slow growth/high yield dividend stocks that returns to me fixed income like returns as a way to mitigate against any downside risk.

I better explain. There’s many ways of dividing up the dividend stock world- by industry, geography etc. I like dividing it up into fast growth and slow growth. Fast growth dividend stocks are stocks that are both increasing their dividends and their stock price. They tend to be members of the dividend aristocrats (well-managed businesses that have increased their dividend for the last 7 years straight) and in growth industries such as banks, insurance companies and real estate companies (remember this is a historical list and do not take recent history to be indicative of historical trends). Here’s a quick and dirty on finding members of the dividend aristocrats. Their dividend yields tend to be in the 2-4% range because their share prices keep appreciating.

These stocks, because they are both growth and income oriented, tend to appreciate in good times but, conversely, drop in bad times (financial stocks tend to both lead the down-turn and the recovery). The second issue is that if these stocks raised their dividends too much in good times, they are exposed to a dividend cuts or halts in a downturn. A prime example is Citigroup who rode the housing and private equity boom up but got caught when they both crashed, leading to a battered stock price and a dividend cut.