Fund Flows Depict a Nation Cowering in the Basement, Afraid of the Stocks-Boogeyman

Through the first 11 months of 2012 investors have poured a net $346 billion into bond mutual funds and exchange-traded funds (ETFs) according to Morningstar data. Our collective appetite for stocks? A net $11 billion.

Just to reiterate: For every dollar of net inflow into stock funds and ETFs there has been about $31.50 plunked into bonds. Despite the fact that major stock indexes have thumped bond returns. Both the SPDR S&P 500 ETF (SPY) and the iShares MSCI EAFE ETF (EFA) have total returns triple the gain for the Vanguard Total Bond Index ETF (BND).

SPY Total Return Price Chart

SPY Total Return Price data by YCharts

Astute profit taking? Nah. This is just a continuation of a trend that has not let up since the financial crisis: investors shedding equities and camping out in bonds. It hasn’t mattered much whether stocks have been up or down. Investors just aren’t buying stocks.

Yet there is no sane scenario you can point to that bonds are a timely investment. Unless you venture into junk, yields aren’t keeping pace with inflation. And there’s scant room left for bond prices to rally; you need rates to fall for that to happen. Sure, a recession or global jolt could trigger another flight to safety; but any dive in yields from here would be akin to jumping from the pool’s edge, not from the high-dive platform.

10-Year Treasury Note Yield Chart

10-Year Treasury Note Yield data by YCharts

The $346 billion bet on bonds certainly isn’t being stoked by the big money. When was the last time you heard a money pro recommend a tactical shift out of stocks and into bonds?

Even the folks stuck investing in bonds aren’t trying to talk up their stomping grounds. Pimco’s bond chieftain Bill Gross takes every opportunity to dial down expectations. In his December commentary he opined that “ Investors should expect future annualized bond returns of 3–4% at best.” That’s not to suggest Pimco is finding lots to love in equities either. Gross said equity returns should be “only a few percentage points higher” than bonds. Still, those are some potentially crucial few extra points. The long-term rate of inflation is about 3.5%. So Pimco is pretty much saying bond market returns will at best match inflation’s historical trend. If you’re investing for a long-term goal-say retirement, which is the bulk of mutual fund money-bonds aren’t how you’re going to maintain your standard of living.

Doubline’s Jeff Gundlach, another bond maestro closely followed by the Street has been spending a whole lot of time talking up stocks, not bonds. Just last week he told Barron’s “I would not be surprised to see some [upward] pressure on Treasury rates next year.” He’s looking for a drift up, not some dramatic spike. But any rise in interest rates is going to hurt bond performance; as yields rise prices fall.

Right now the $18 billion Vanguard Total Bond index fund has a 30-day SEC yield of 1.6%. That’s the annualized yield you could expect to receive based on the actual payouts of the fund for the past 30 days.

Using my YChart Stock Screener of the 51 stocks in the S&P 500 that have delivered rising dividend payouts for at least 25 consecutive years-the Dividend Aristocrats-turned up more than a few blue-chips with dividend yields at least double that payout trading at decent (read: not cheap, but not expensive either) valuations. McDonald’s (MCD) and Sysco (SYY) both have 3.5% dividend yields. Walgreen’s (WAG), rated Attractive by YCharts has a 3% dividend yield.

General Mills (GIS) isn’t included in the S&P 500, but it has one of the most durable dividend records, having raised its payout for more than 100 years running. Most impressive is that General Mills’ dividend payout has grown 140% over the past decade.

GIS Dividend Chart

GIS Dividend data by YCharts

That General Mills managed such robust dividend payouts without putting upward pressure on the dividend payout ratio (the percentage of profits the dividend represents) and the cash dividend payout ratio (the proportion of free cash flow that goes to dividend payouts) is good evidence that its dividend gravy train is in great shape.

Carla Fried, a senior contributing editor at, has covered investing for more than 25 years. Her work appears in The New York Times, and Money Magazine. She can be reached at



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