This portfolio will pay you twice as much as bonds

Retirees looking to generate passive income from their investments might want to cast their eyes to Europe and Asia, where entire stock markets are currently offering yields more than twice that available from a standard U.S. bond portfolio.

The Singapore stock market is sporting a 4% forward yield, according to FactSet, meaning an investor is likely to get about $4 in dividends over the next 12 months for every $100 invested in the broad index. Australia’s forward yield is 3.8%, Italy and Spain are paying out 3.7%, and the London stock market 3.3%.

By comparison the Vanguard Total Bond Market Index Fund
VBTLX,
0.18%

will pay you just 1.4% and the Vanguard Intermediate Corporate Bond Fund
VICSX,
0.23%

just under 2%.

It’s easy to come up with the standard objections to investing in overseas markets, especially for retirees concerned with “safety.” Foreign stock markets are “risky,” according to the standard but vague Wall Street patter. Exchange rate fluctuations can cause your dividends to rise or fall. And companies can cut their dividends, whereas U.S. bond coupons are, in theory, more secure.

But none of these really wash. We’re not talking about high-risk countries. We’re talking about highly developed economies with the rule of law, and well established and highly liquid stock markets. (If you want to talk “risk,” by the way, the Russian stock market is offering a dividend yield of nearly 9%.)

As for dividend cuts: These have already happened. Last year saw huge cuts almost everywhere, due to the Covid crisis. So these yields already reflect the cuts.

If the future bears any resemblance to the past we can expect to see dividends overall rising in the years ahead.

But if you buy a bond paying 1.4%, that’s all you’re going to get. Governments and companies do not increase the coupons on existing bonds when conditions get better.

You don’t even have to reach into the more volatile industries to find fat dividend yields. In London, a market I covered for many years and which I know pretty well, the real-estate investment trust British Land
BTLCY,
1.43%

is yielding 4%, utility National Grid
NGG,
0.86%

is yielding 5.6%, and insurance giant Legal & General
LGGNY,
-0.11%

more than 7%. These are all considered blue chip, widow-and-orphan type stocks. According to FactSet, major telecom stocks across the developed markets of Europe and Asia are paying an average of 4.8%, utilities 3.9%, and real-estate investment trusts 4.2%.

It’s easy to forget during these days of zero interest rate policies and quantitative easing that once people are retired they have traditionally hoped to be able to live off their accumulated savings. And they’ve wanted to live off the passive income it generates rather than just spending down the principal.

Good luck with that now.

Boston money manager Jeremy Grantham thinks this is the most overvalued bond market in recorded human history. OK, OK, so Grantham’s critics say he’s always gloomy. But is he wrong about this? For most of the past century, according to data from NYU’s Stern School of Business, an investor in a broad basket of good quality U.S. bonds could typically expect to earn about 2% a year (or more) above the rate of inflation. Today the 10-year U.S. Treasury
TMUBMUSD10Y,
1.436%

Note is paying less than half the rate of inflation, and shorter-term bonds even less than that.

Those worried about the “risks” to stock market dividends in Europe and Asia might want to ponder the risks to retirees of trying to live off income that shrinks in real terms every single year.

Yet it’s not unusual to see retiree portfolios which are 70% or more invested in bonds. Heaven help us.

The issue here isn’t whether high-dividend stocks will end up outperforming the overall stock market over time. It’s whether they’ll end up outperforming bonds over the course of a 30 or 40 year retirement.

Most of these options are easily investible from the U.S., too.

There are iShares Singapore ETF
EWS,
-0.22%

and Spain ETF
EWP,
-0.42%

exchange-traded funds, though they charge 0.51% a year in fees. And for other markets the options are much cheaper. For example Franklin Templeton offers Australia
FLAU,
1.01%
,
Italy
FLIY,
-0.11%
,
and FTSE U.K.
FLGB,
0.08%

funds charging just 0.09% a year. Vanguard has a Global ex-US Real Estate ETF
VNQI,
0.92%
,
charging 0.12%. Meanwhile, many individual blue-chip international stocks also have U.S.-traded American depositary receipts, which means their stocks can be bought easily and cheaply through any U.S. brokerage.

Or, you can stick with bonds that lose you money.