I awoke this morning with deep thoughts on the Economy, Income, and Investments. The Nation is going through quite an interesting shift. We had a, "Non-Consecutive," President stamped to enter the Whitehouse. Remember when that happened?
Some of Trump’s 2024 proposals focus on cutting taxes, like eliminating taxes on Social Security, overtime pay, and tips, and creating deductions for items like home generators and car loan interest to address specific financial pressures on Americans. He has also proposed a dramatic cap on credit card interest rates to alleviate debt burdens. On corporate policy, he intends to reduce taxes for companies producing domestically and reinstate certain deductions, like the state and local tax (SALT) deduction, which his 2017 tax plan had previously limited.
On foreign policy, Trump has expressed a desire to quickly end the Russia-Ukraine conflict, though he has not shared specific strategies. He has pledged to limit Chinese investment in U.S. land, reflecting his broader goal of tightening national security against perceived foreign threats.
In social policy, Trump’s campaign plans include controversial reforms, such as restricting gender-related policies in public institutions, promoting “freedom cities” on federal land, and creating "baby bonuses" to support young families. He also intends to shift control of federal initiatives, such as requiring standardized tests for federal employees and expanding his ability to hire or fire within the civil service.
My Connected Thoughts for, Income/Investing: Dividends and/or Treasuries
Dividend stocks and 30-year Treasury bonds are two of the most popular vehicles for income-oriented investors. Each offers unique advantages, potential risks, and adaptability to economic conditions. In a shifting economic landscape, especially with concerns about inflation and currency devaluation, understanding the strengths and adaptability of dividend stocks versus 30-year bonds is essential for informed decision-making.
Strengths of Dividend Stocks
Dividend stocks are shares in companies that regularly distribute a portion of their profits to shareholders as dividends. These stocks can be highly appealing for their potential to provide both income and capital appreciation. Here are some key strengths of dividend stocks:
Income with Growth Potential: Dividend stocks provide an income stream that can grow over time. Companies that increase dividends over time—often referred to as “dividend aristocrats”—provide a hedge against inflation, as the dividend income keeps pace with or outpaces the cost of living.
Potential for Capital Appreciation: Unlike bonds, which have fixed values at maturity, dividend stocks can appreciate in value. If the underlying company grows or benefits from favorable market conditions, shareholders not only receive dividends but also benefit from an increase in stock price. This offers a chance for total returns that bonds generally don’t match.
Tax Efficiency: In many jurisdictions, qualified dividends are taxed at a lower rate than regular income, making dividend stocks tax-efficient. By comparison, bond interest is often taxed as ordinary income, which can be a higher rate for some investors.
Inflation Hedge and Currency Weakening: Companies with global operations or substantial pricing power (like those in essential sectors such as utilities or consumer staples) can adjust prices to reflect inflation or a weakening dollar. As prices rise, these companies might also increase dividends, providing some protection against inflation and currency devaluation.
Strengths of 30-Year Treasury Bonds
30-year Treasury bonds are long-term government bonds that offer fixed interest payments (coupons) every six months. Treasuries are often viewed as one of the safest investment options. Here’s why they remain attractive:
Safety and Stability: 30-year Treasury bonds are backed by the U.S. government, making them one of the safest investments. Investors who prioritize capital preservation and predictable income often choose Treasuries, as they have virtually no credit risk compared to dividend stocks, which can decline in value due to market volatility or company-specific issues.
Reliable Income: Treasury bonds pay a fixed interest rate, providing consistent, reliable income regardless of market conditions. This fixed income is especially appealing to retirees or risk-averse investors who value stable cash flow over potentially volatile dividends.
Interest Rate Stability: The income from a 30-year bond is fixed for the life of the bond, insulating the investor from the effects of fluctuating interest rates. While bond prices fluctuate with interest rate changes, the interest income remains constant if the bond is held to maturity.
Deflation Protection: In a deflationary economy, where prices decline and economic growth slows, Treasury bonds tend to retain value better than stocks. If a period of deflation were to occur, bond yields would remain valuable as purchasing power increases, making bonds a protective investment.
Adaptability to a Weakening Dollar
If the U.S. dollar weakens, both dividend stocks and Treasury bonds react differently, each with specific adaptive characteristics.
Dividend Stocks: Dividend stocks, especially those from multinational companies, tend to adapt better in a weak dollar environment. As the dollar declines, U.S. exports become cheaper for foreign buyers, potentially increasing revenue for companies with international sales. Many of these companies might increase dividends if profits rise, providing shareholders with increased income and helping offset the effects of currency depreciation. Sectors like technology, industrials, and consumer goods—often with global sales—could benefit, leading to potential growth in both dividend payouts and stock prices.
30-Year Bonds: Treasuries, on the other hand, are generally less adaptive to currency devaluation. Since the interest payments on Treasury bonds are fixed, they do not increase with inflation or currency weakening. Consequently, bondholders receive the same nominal interest regardless of the dollar’s value, which can erode real purchasing power if inflation rises significantly. However, if investors perceive increased risk in stocks due to inflation, they may flock to bonds, potentially pushing Treasury prices higher due to increased demand, which could provide some capital appreciation.
Which Produces Greater Income?
In an inflationary or currency-weakening environment, dividend stocks generally have the edge over 30-year bonds when it comes to income generation:
Dividend Growth Potential: Dividend-paying companies have the potential to raise their payouts over time. Many dividend-paying companies increase dividends annually, particularly those in essential sectors, making their income-generating power more resilient against inflation or a weakening dollar. This ability to increase payouts allows dividends to keep pace with or exceed inflation.
Bond Income Is Fixed: Treasury bonds offer stability but do not increase payments over time. Consequently, bonds can lose purchasing power in inflationary environments, as bondholders’ income remains fixed while the cost of goods and services rises.
Why Bonds Remain Favorable to Stocks
Despite the income growth potential of dividend stocks, bonds, particularly Treasuries, retain several advantages:
Capital Preservation: Treasuries are a near risk-free investment, making them ideal for investors who prioritize preserving their capital. Stocks, even dividend stocks, are subject to market risk and company-specific factors that can lead to losses.
Low Volatility: Bonds tend to be much less volatile than stocks. This stability can provide peace of mind and reduce portfolio drawdowns, which is especially valuable during economic downturns or market crashes.
Diversification: Bonds serve as a counterbalance to stocks in a diversified portfolio. In times of market stress, bonds often hold steady or even increase in value, as investors seek safe assets. This relationship makes bonds a valuable tool for reducing overall portfolio volatility.
Fixed Income for Predictable Needs: For retirees or those with fixed financial needs, the steady, predictable income from Treasury bonds can be essential. Dividend stocks, although potentially lucrative, do not offer guaranteed payouts and may reduce or eliminate dividends in times of financial strain.
What I Think, What I'm Planning
Auction: 30-Year Bond
- Announcement Date: Wednesday, October 30, 2024
- Auction Date: Wednesday, November 06, 2024
- Settlement Date: Friday, November 15, 2024
Auction: 30-Year Bond (Reopening)
- Announcement Date: Thursday, December 05, 2024
- Auction Date: Thursday, December 12, 2024
- Settlement Date: Monday, December 16, 2024
Auction: 30-Year Bond (Reopening)
- Announcement Date: Thursday, January 02, 2025
- Auction Date: Thursday, January 09, 2025
- Settlement Date: Wednesday, January 15, 2025
A "reopening" in the context of Treasury securities means that the U.S. Treasury is issuing additional amounts of an existing security rather than creating a new one. For example, if a 30-year bond was originally issued earlier in the year, a reopening will offer more of the same bond with the same maturity date and coupon rate as the original issue.
Reopenings are typically used to provide additional supply of a bond that's in high demand, allowing investors to purchase more without the Treasury having to launch a completely new bond series. The advantage for investors is that the reopened bond trades under the same ISIN (International Securities Identification Number) as the original issue and has the same maturity date, which can make it easier to manage portfolios.
For the Treasury, reopenings help to improve market liquidity and keep the borrowing process more efficient by allowing them to meet financing needs without issuing an entirely new bond
Yes, the bonds issued in December, and I believe January, are as a reopening of the November 15 bonds will have the same characteristics—such as the same coupon rate, maturity date, and terms—as the original November issuance. This is because a reopening involves issuing additional amounts of an existing bond rather than creating a new bond series.
My Thought
Both dividend stocks and 30-year Treasury bonds provide valuable tools for generating income, each with unique strengths. Dividend stocks offer growth potential, an inflation hedge, and adaptability to currency fluctuations, making them attractive in an environment of inflation and a weakening dollar. However, they come with higher risks and volatility. In contrast, 30-year Treasury bonds offer stability, safety, and predictable income, making them ideal for conservative investors or those with immediate income needs.
In a portfolio context, a balanced mix of dividend stocks and Treasury bonds can combine the benefits of income growth, capital preservation, and risk reduction, enhancing adaptability to various economic conditions. By thoughtfully allocating between these two, investors can create a resilient income stream while managing risk across changing economic landscapes.
