Bonds are an important asset class to own in a diversified portfolio. Bonds offer many benefits such as providing a stable income, relatively better safety with high-quality bonds, preservation of capital, etc. Another important point to note about bonds is that they tend to cushion a portfolio during adverse equity markets. To put it in a different way, traditionally when stocks decline bonds tend to go up and vice versa. So depending on an investor’s long-term goals and risk tolerance, a small amount of bonds can be added to a portfolio consisting of various asset classes.

I came across an article in the journal last month that noted bonds also fell in 2022 when equities plunged. It was the first time this happened. From the piece:

Bonds helped offset some of the pain of the previous market crises, including the bursting of the dot-com bubble in 2000, the global financial crisis of 2008 and the short-lived market panic brought by the onset of the Covid-19 pandemic.

That didn’t happen in 2022. An index that largely holds Treasurys, highly rated corporate bonds and mortgage-backed securities fell 13%, posting its worst year on record, while the S&P 500 declined 18%.

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Source: The 60-40 Investment Strategy Is Back After Tanking Last Year, WSJ

Related ETFs:

• SPDR S&P 500 ETF (SPY)
• Vanguard Total Bond Market ETF (BND)
• iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)

Disclosure: No positions

Money market funds have become one of the attractive asset classes to own this year. Some of these funds are yielding between 4% to 5%. The extreme volatility in the equity markets and investors’ looking for decent yields are helping these funds gain huge inflows. Though these funds are not FDIC-insured and have risks investors are still pouring billions into them.

With that brief intro, let’s take a quick look at the top two money market funds.

The top two finds based on year-to-date inflows are the Vanguard Federal Money Market Fund (VMFXX) and the Schwab Value Advantage Money Fund-Investor Shares (SWVXX) according to a recent journal article.

1.Vanguard Federal Money Market Fund (VMFXX):

This fund has an asset base of over $240 billion and currently has a 5-day SEC yield of 5.02%. The expense ratio is 0.11%. However the fund has a minimum investment of $3,000.00. Dividends are paid out monthly.

2.Schwab Value Advantage Money Fund-Investor Shares (SWVXX)

SWVXX has total net assets of over $120.0 billion. The expense ratio is a bit high at 0.35%. The current 7-day yield is 4.90%. Similar to the Vanguard fund, this fund also pays dividends monthly.

Source: What Investors Should Know About Money-Market Funds and CDs

Disclosure: Long SWVXX

Dividends are an important part of total returns when investing in equities. Dividends account for large differences in returns between price returns and total returns. In addition to that, dividend growers are more important for the growth in total returns. The following chart shows the stark differences in return between the S&P 500 Total Return Index vs. S&P 500 Dividend Aristocrats Index:

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Source: Tapping the Power of Global Equity Dividends by Yoichiro Kai, T.Rowe Price

An excerpt from the above piece:

As an example, the S&P 500 Dividend Aristocrats Index, which represents over 60 S&P 500 companies with 25 consecutive years of dividend increases, has outperformed the S&P 500 Index by more than 75% since 1989 (Figure 4). By identifying companies with the ability to sustain and grow dividends and taking an active, global approach, we believe we have the potential to drive consistent long‑term returns.

So the key takeaway is that dividends can have a substantial impact on total returns especially over the long run. Hence even small dividend yields matter when picking dividend paying stocks. The above chart vividly shows that companies that grow their dividends consistently will generate much higher returns than the ones that just pay dividends.

Related ETFs:

• SPDR S&P 500 ETF (SPY)
• iShares Core S&P 500 ETF (IVV)
• Vanguard S&P 500 ETF (VOO)
• SPDR Portfolio S&P 500 ETF (SPLG)
• iShares Select Dividend ETF (DVY)

Disclosure No positions