Are bonds safer than stocks?
Bonds vs. stocks
Q. Is it better to invest in bonds than in stocks, because they’re safer?
– T.W., Columbia, Missouri
A. Not necessarily. Stocks tend to grow faster – and you can still lose money with bonds. According to researcher Jeremy Siegel, stocks outperformed bonds in 96% of all 20year holding periods between 1871 and 2012 and in 99% of all 30-year holding periods. Between 1926 and 2012, the annualized growth rate for stocks was 9.6%, versus 5.7% for long-term government bonds.
Meanwhile, interest rates have been very low for many years now, so they’ll likely start rising one of these years. When they do, the value of existing bonds (with lower interest rates) are likely to drop. You can always hold a bond until maturity to get your full principal back, but that can take a long time.
The values of bond mutual funds can fluctuate with the bond market; they often hold a diverse range of bonds to reduce risk. The stock market can be volatile over a few months or years, but over the long run, it tends to rise. Park long-term dollars in stocks, and put short-term savings in short-term bonds, money market accounts or CDS.
FOOLISH TRIVIA Name that company
I trace my roots back to 1985, when a Sears employee tested a new credit card. A year later, Dean Witter Reynolds, then a financial services subsidiary of Sears, debuted that card. It was unusual because it charged no annual fee, sported a higher-thanaverage credit limit and offered cash rewards to users. That card is under my roof now, and its name is part of mine. Today, with a market value near $21 billion, I’m one of America’s largest card issuers. I offer banking services, too, and charge no fees on deposit products such as checking accounts. Who am I?
Last week’s trivia answer
I trace my roots back to a home built in Fort Worth, Texas, in 1978. Today, with a market value recently over $28 billion, I’m the nation’s largest homebuilder by volume – and have been since 2002. I operate across 29 states, recently employed almost 9,000 people and rake in close to $19 billion annually. I close on more than 60,000 homes per year, and have built more than 770,000 homes. My homes are sold under my own name, as well as Emerald Homes, Express Homes and Freedom Homes, with prices ranging from $100,000 to more than $1 million. Who am I? (Answer: D.R. Horton)
THE MOTLEY FOOL TAKE
A company to gush over
With the price of oil down, shares of integrated energy giant Chevron (NYSE: CVX) have fallen considerably in 2020, pushing the dividend yield up – recently to 7%. Here’s why you should consider Chevron for your portfolio.
For starters, while clean energy alternatives are increasingly displacing oil and natural gas, that’s likely to take a long time. And with many energy companies drilling less in the face of low oil prices, those prices may well spike at some point due to low supply.
Chevron’s strong balance sheet is another plus. The key to surviving in a highly cyclical industry like energy is being strong enough to handle the down years so you can thrive in the up years. That has long been a focus at Chevron, which has one of the best balance sheets in the industry. Its debt-to-equity ratio is lower (i.e., better) than many big peers – and that’s after it borrowed billions of dollars so it would have ample resources to deal with the impact of the COVID-19 crisis on energy demand.
Then there’s that dividend. There’s no guarantee it won’t be trimmed or suspended in this pandemic environment, but Chevron’s management has made it a priority to sustain its payout and increase it over time. Buying into the stock now may generate solid income for many years.