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"Most people are not going to have adequate retirement," BlackRock CEO Larry Fink said recently. "Most people are too invested in bonds; they need a comprehensive equity portfolio."

If you've got 10 years or more, says Fink, bonds won't get you anywhere. "You own a 3% asset [bonds] because you're frightened of today."

He couldn't be more right. Here's one way to think about this. Assets compete against each other for investors' attention. When bonds are more attractive than stocks, favor them. When stocks look better, lean toward them. When cash looks like your best bet, do what you gotta do. In any case, the attractiveness of one asset depends on the value of another.

For now, let's focus on the trade-off between stocks vs. bonds.

The yield on the 10-year Treasury note is about 3% right now. The average dividend yield for the 30 stocks in the Dow Jones Industrial Average is 2.8%. That spread -- 0.2% -- is absolutely pitiful. Since 1970, the spread between the dividend yield on large-cap stocks and 10-year Treasury bonds has averaged more than 4 percentage points. Today it's virtually nothing.

That's insane. Think about it. The yield on bonds, of course, is fixed (at least in theory ... let's see if we can raise the debt ceiling). Dividends have grown by more than 4% annually for the past decade. The former doesn't even compensate you for inflation. The latter grows faster than it.

For the benefit investors obtain from bonds -- they don't wobble to and fro -- investors have resigned themselves to negative real returns. You don't own that kind of asset to make money. You do it, as Fink says, because you're frightened of today.

And the numbers are actually crazier than they look. Today's dividend payout ratio on large-cap stocks is about half of its long-term average. If companies simply reverted to paying the historic average percentage of profits out as dividends, dividend yields on stocks would be substantially higher than the yield on 10-year Treasury bonds.

Nothing's certain, but that's about the strongest indicator you'll get that stocks will outperform, even slaughter, bonds over the next decade. History backs this up.

Still, does the fact that stocks should crush bonds mean stocks will perform well? History has a word on this, too: The likely answer is yes. Even so, a world where both broad stock markets and bonds do nothing for investors isn't unthinkable. Smart stock picking is still vital. Here are four companies I own that make me excited to be an investor over the next few years.

Microsoft (Nasdaq: MSFT  )
Less than nine times forward earnings, still growing a healthy clip, pays a 2.7% dividend, and could (and should) pay a substantially higher dividend if it wanted -- the company generates more free cash flow than it knows what to do with. It's staggering how many people think Microsoft is a dinosaur because it only has a 90% market share and grows 10% a year.

Berkshire Hathaway (NYSE: BRK-B  )
Berkshire now trades at about the lowest valuation it ever has. The worst you can say about the company is that Buffett is old. But whatever "Buffett premium" shares held in the past is now effectively gone. This is a collection of some of the world's best businesses trading at a price appropriate for a decidedly average company. Exploit that.

Philip Morris International (NYSE: PM  )
Scared of the U.S. economy? Worried about inflation? Doesn't get much better than this. PMI generates all of its business outside the U.S. and has a history of being able to raise prices faster than inflation. For better or worse, smoking rates in other parts of the world are substantially higher than the U.S., putting PMI in a similar position former parent Altria (NYSE: MO  ) was several decades ago: set up to generate massive returns for shareholders.

Paychex (Nasdaq: PAYX  )
This is one of my favorite companies. The business is simple -- processing paychecks for small- and medium-sized companies -- but it's uniquely profitable for two reasons. First, switching costs are high. Once customers join Paychex, they tend to stick around. Two, Paychex holds cash for customers before checks are cut. It earns money on these funds in the meantime by sticking them in short-term debt securities. This side business could become quite profitable if interest rates rise -- an almost certainty going forward.

What do you think? Drop a thought below.

Fool contributor Morgan Housel owns shares of Microsoft, Berkshire, Philip Morris International, Altria, and Paychex. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Philip Morris International, Berkshire Hathaway, Altria Group, and Microsoft. Motley Fool newsletter services have recommended buying shares of Paychex, Berkshire Hathaway, Microsoft, and Philip Morris International. Motley Fool newsletter services have recommended creating a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (29) | Recommend This Article (46)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 15, 2011, at 4:48 PM, prginww wrote:

    I'm a retiree and an ex-BRK-B share holder....I sold because I was too poor to own a company that didn't pay me a dividend....if I were younger(and Buffett was too) I would look at the BRK differently....but at this stage of my life, I need more than just cap appreciation potential on my investment....just my .02, because we're all at different stages of our lives/investing careers

  • Report this Comment On June 15, 2011, at 6:00 PM, prginww wrote:

    I have lost my respect for Housel. Ethics have a role

    in investing. Owning Philip Morris is owning a

    company that promotes death.

  • Report this Comment On June 15, 2011, at 8:00 PM, prginww wrote:

    Here's the problem. Because yields on bonds are so pitiful, investors feel they have little choice but to look for yield and growth in stocks which helps push stock prices into over-valued territory. Chasing yields can be dangerous causing an investor to ignore value. Given that statistics such as the Shiller 10 year p/e indicate that stocks are still expensive investors chasing yields in stocks may be exposing themselves to more risk that they realize.

    Although you mention it in passing, cash is often dismissed as a viable option. Sure CD rates stink for the moment but the opportunistic aspect of cash should not be overlooked.

    So if the options are:

    A)Invest in bonds with approxiamately 1% real return

    B)Invest in stocks with a real return of 3-4%(given the over-valued nature of the market) with the real risk of losing 10-20% in the short term

    C)Hold onto cash in an online CD with a -1 to 0 real return and wait for a better investment environment.

    What would you do?

  • Report this Comment On June 15, 2011, at 8:16 PM, prginww wrote:

    PM is my #1 holding and a cash machine. Even with today's pullback, it yields close to 4% and will raise it's dividend in October like usual. Last fall they raised by 6 cents. Last conference call PM raised their guidance by $0.10 to $0.20 cents, and PM pays out 60%+ of their earnings to shareholders. Also, PM buys back 5 billion dollars a year of their own stock, up from 4 billion per year since spinoff in 2008. These things create more of a bottom to the downside in addition to the ever-growing yield. To the guy who "lost all respect" for the author for suggesting PM as a viable option compared to the 10-year Treasury yielding 3% when real inflation is basically close to that already, you stick to your ethics, and I'll stick to making money.

  • Report this Comment On June 15, 2011, at 9:01 PM, prginww wrote:

    I agree with the sentiment, disagree with most of the picks(except for payx), and 6thTexasCalvary and ds10 gave my reasons why for 2 of them(but I haven't lost respect for you).

  • Report this Comment On June 15, 2011, at 9:04 PM, prginww wrote:

    ds10 said: "Owning Philip Morris is owning a company that promotes death."

    Well, I'd rather think of it as a hedge against other people's stupidity. Since you're buying the shares in the secondary market, Philip Morris isn't making any money from your share purchase, and yet they pay you a substantial dividend, so you're taking away from their profits. I'd invest in Bond Villains Inc. if they could pay me the 7% yield-on-cost that Altria is paying me.

  • Report this Comment On June 15, 2011, at 9:20 PM, prginww wrote:

    How many of the holdings of Berkshire Hathaway are not publicly traded? What is it's NAV, and how does it compare to it's current price? Much like valuing a closed end fund.

  • Report this Comment On June 15, 2011, at 9:22 PM, prginww wrote:

    pryan37bb wrote: "I'd invest in Bond Villains Inc. if they could pay me the 7% yield-on-cost that Altria is paying me."

    Plus, Bond Villains Inc holds their annual stockholders meeting in that underground volcano lair.

    That's a heck of a lot better than going to Omaha.

  • Report this Comment On June 16, 2011, at 7:56 AM, prginww wrote:

    I do invest in stocks which pay a dividend, and PAYX is one of them. I don't own PM, but then again I don't own any "green" stocks. Somewhere in the middle I suppose is JNJ, which I own. Nor do I own BRK-B, simply because I wanted a diversified portfolio with some but not all of the stock portion to individual stocks. I chose mostly dividend payers. The rest is to specific mutual funds. In so doing I wanted to adhere to a prudent allocation.

    In reading the article, I conclude it's purpose is to state that over investing in bonds is not a good idea. That is, if I do, I should expect lower overall returns from my portfolio.

    On the other hand, I don't see Morgan advocating over investing in stocks, either.

    Reading this, I assume the purpose is to state that of that allocation of my investments that are tagged for large caps, that it might be a good idea to put some of that into specific companies "if you've got 10 years or more.." No problem.

    Fink's statement is supported by a lot of recent research on the inadequacy of savings of those over 50.

  • Report this Comment On June 16, 2011, at 9:37 AM, prginww wrote:

    To add to the point made against ds10's bizarre comments - I would see an investment in PM also as a hedge against the rising costs of healthcare due to the individuals who consume their products.

  • Report this Comment On June 16, 2011, at 9:58 AM, prginww wrote:

    There are plenty of corporate and foreign government bonds that yield over 3%. My bonds purchased over the past year yield well over 6% on average. An over simplification as usual from these short MF columns.

  • Report this Comment On June 16, 2011, at 10:01 AM, prginww wrote:

    where is the "like" button? ;)

  • Report this Comment On June 16, 2011, at 11:54 AM, prginww wrote:

    JayDel, are your bonds longer than 15 years? I prefer to use short to mid-term (2-8 years) muni bonds as a tax-free cash income stream. Other than that, stocks and private placements is where you create long-term wealth.

  • Report this Comment On June 16, 2011, at 1:35 PM, prginww wrote:

    It is so easy for a guy with a net worth of probably well over $500 million (Fink, not Housel) to suggest that it's a no brainer to be in stocks.

    Forget about the 10 year horizon (btw, it was a 5 year horizon when I was in biz school 10 years ago, funny how things change) as the determining factor. The real factor is can you stand to lose 30%-40% of the pot a few times randomly spaced over your investing horizon? A guy like Fink can park 90% of his assets in stocks because you know what? His timeline isn't ten years - its essentially infinite. He will never need to spend that money, it will pass to his heirs, and so on, and so on. If that's what you're dealing with, then yes, go all in because the volatility is meaningless to you.

    For real people planning for retirement, who may actually need to start spending down the funds begining at some point, potentially down to zero - well, can you take the gamble that your pot may drop 20% annually for the three consecutive years prior to your retirement? What if your $1 million turns into $500,000 the year you turn 55? Heck, you still have 10 years to earn it back, right? How about it grows back to $1 milion over those ten years, then drops back down to $500,000 when you turn 65? Ouch. That can actually happen, folks.

  • Report this Comment On June 16, 2011, at 1:59 PM, prginww wrote:

    I'd watch out for Bond Villains Inc. I heard the last guy that tried to float a say-on-pay shareholder vote ended up in the shark tank.

  • Report this Comment On June 16, 2011, at 2:15 PM, prginww wrote:

    I just ran a performance illustration on Microsoft stock. If you would have put $25,000 into their stock early 2000, for the last eleven years or so your annual rate of return comes to barely 1%. This includes a stock split in 2003 plus their divis since 2003 reinvested in MSFT stock.

    Your current position value of the stock present day is somewhere in the neighborhood of $27,500.

    Now lets say you had put that same $25,000 into a medium term investment quality grade corporate bond with a 5.5% coupon like Boeing or Walmart etc., paid face value for the bond and reinvested the interest annually.

    Today this bond position would be worth $45,052.

    Bottom line is every stock and/or whatever asset type/class position is unique to that specific point in time. You can not necessarily always be looking in the rear view mirror. I merely posted this information because I am obsessed with the mathematics side of this game. You have to find something that works for your own objectives. There is no universal solution for everyone.

  • Report this Comment On June 16, 2011, at 4:14 PM, prginww wrote:

    Great point, ytm. But the mathematics piece is only one of three in this game. The math part is the one that we have the most control over (MBAs/Accountants/Avid Number Crunchers love this one the most).

    The second piece is the strategy piece. We need to be well-diversified and not have all of our eggs in one basket (I love that Morgan recommended stocks from 4 different industries). But, there's also some risk in the non-calculatable, company-specific factors here. For example - who is the management and what are their goals for the company? Are they aligned with us as shareholders?

    Then there's the third piece, which is the macro-environment. The superunknown...and we have no control over this at all. Who could have seen 2008 coming and pulled all of their money out of stocks? We've got to place some bets on factors that we 'know that we don't know'. Some companies will win and others lose based on political and social mega-trends.

    So to tie this all back to the majority of the comments posted about this article. It's not just a numbers game when you're comparing stocks to bonds. It's not just "stocks win, bonds lose", even if bonds are only yielding 3%. If it was, anyone could figure out really quickly that rising dividends and share price appreciation would outpace bonds if there was a guarantee of no downside. But there IS that risk, and as investors we have to assess a discount (or premium) to pieces #2 and #3 and compare that to what Mr. Market is offering.

    "Assets compete against each other for investors' attention." [quote from a smart guy earlier this afternoon]. Owning PMI isn't an ethics issue - it's a perception issue. Similarly, right now public perception seems to be that stocks are going to take it on the chin in the coming years.

    How does that compare to what you are willing to risk?

  • Report this Comment On June 16, 2011, at 4:24 PM, prginww wrote:

    Pipelines, cigarettes and electricity are my bonds now.

  • Report this Comment On June 17, 2011, at 6:51 PM, prginww wrote:

    Morgan, any concerns about PM (and MO's) debt?


  • Report this Comment On June 19, 2011, at 3:52 AM, prginww wrote:


    From a purely analytical and objective analysis you're right about PM. Balancing risk vs return is the name of the game. BUT, I don't think you can dismiss the ethical issue of selling cancer, enormous medical bills and death, esp. to segments of the world population with little education, as a perception issue.

    That some of us choose to also vote on social issues with our investment dollars can be considered spiritually fulfilling. Not to mention if enough of us do so it would then become educational and directional to those who may think otherwise (or not think of ethics at all).

    Commerce without morality is one of Gandhi's eight blunders of the modern world. I think capitalism - morality = greed. Anyone who thinks otherwise, who now owns GS or AIG, etc. after their complicity in the current state of affairs (see the movie 'Inside Job'), is akin to Gordon Gecko and deserves melamine in his baby's formula* and his cat's food as an "extender." No one has a problem condemning such behavior. See? You vote ethically whether you think you do or not.

    *Didn't China actually execute some people responsible for that?

  • Report this Comment On June 22, 2011, at 5:50 PM, prginww wrote:

    PM? - morality aside (it's been covered by others and I concur) when new graphics will be released where will be the sales?

    MICROSOFT? - it's hardly a growth stock anymore.

    Oh, so Larry Fink is now god and knows the future? One only needs to look at LONG TERM chart to realize since mid 90s market was anything but reliable in trend.

    Bonds don't have to pay 4% - plenty pay around 6% (not financials - utility and energy delivery) and provide nice stability effect to one's retirement portfolio. And if you were not afraid to invest in 2008-09 you could easily get 8-10% interest from bonds of companies on Fortune 500 list. And you would have 30-50% capital gains on them by now as well.

    Just MHO.

  • Report this Comment On June 22, 2011, at 5:52 PM, prginww wrote:

    "MICROSOFT? - it's hardly a growth stock anymore."

    At 9x earnings, it doesn't have to be.

  • Report this Comment On June 22, 2011, at 6:04 PM, prginww wrote:

    Just looked - PAYX underperforms S&P500 and DOW by a mile - look at 3 months, 6 months, 1y, 2y, 5y - all way below. -20% over last 5 years - well, at least divvy just about covered it, right?

    +12% over last 2 years? as opposed to 40% for DOW and S&P500? where do I sign up?

    Mr. House, were you paid for this article? and by whom exactly?

  • Report this Comment On June 22, 2011, at 6:08 PM, prginww wrote:

    ^ We're investing for the next 5-10 years, not the past.

  • Report this Comment On June 22, 2011, at 6:33 PM, prginww wrote:


    the point of the article was to explain that for years they underperformed, due to the fact that they were overvalued. But looking at them today, they are undervalued.

    It's like the railroad industry, it was way overvalued for more than 2 decades and nobody wanted to get into it. You've made no money on it if you invested on railroads for a couple decades. Then suddently 2-3 years ago Warren Buffett bought some and people thought he was going nuts. Nowadays everyone wants a piece of railroads again.

    About PM and the new ads... you are thinking US. I'm from Spain, and we've had those ads in here for years... effect on smokers? close to zero. Sales kept rising. It's an addiction, you could do whatever you want to but you can't stop it. That's why they are addictions. PM will still do great and lots of sales are international. Is it the US the biggest market anymore?

    Microsoft... who said it was a growth stock? it's just cheap! at 9p/e with forward p/e of 8, it just has to keep that rate to give you about 15% annual returns plus dividends. And then if they surprise with anything that adds growth (new windows for armh, or a new cool device or whatever), it would shoot that up fast.

    BRK is so undervalued that it's a joke. It's basically trading like it will never grow but people dont' seem to realize that BRK doesn't grow, it's the businesses that it owns which grows. So you have to look at the 60+ owned business and then tell me that you believe that you can do better than Warren Buffett picking investments. You may be able to do so, but could you arguee that his company choices won't even beat the market or move at the same speed than the market? Even moving at the market average should give you around a 10-14% growth.

  • Report this Comment On June 22, 2011, at 7:14 PM, prginww wrote:

    Ok, Mr. Housel (apology for previous misspelling), fair enough - let's consider 10 year horizon.

    PAYX - The technology to receive money over the phone, wired directly into your bank account, or by swiping your debit card is already here - a simple software can process electronic delivery of money and do your taxes - can we consider that small and medium size companies will opt for cheaper solution as more modern workforce will prefer to receive virtual paycheck bypassing the middleman - PAYX, who you prefer because they make money on "holding other people's money for a short time" while printing paper paychecks.

    MSFT - OS X, Linux, Chrome, Android, cloud apps... how long do you think that 90% market share will last? May I remind you of OS2? And what IS Microsoft without Windows?

    PM - more and more countries follow US in restricting smoking. Following that trend, where will be PM revenues 10 years from now? What if just 1 Billion+ population Asian country will sue Big Tobacco? What if it's more than 1?

    Compare that with First Energy bonds (33766JAF0) maturing in 2039, or PSI Energy Bonds (693627AQ4) maturing in 2032 both paying about 6.25%...

    Let's just say I have about 40% in bonds, and if I was 55+ I would have 80% in bonds - regardless what Larry Fink would say. I don't want super returns - I just want beat the inflation and not lose it.

  • Report this Comment On June 22, 2011, at 7:21 PM, prginww wrote:

    BRK-B - firm primarily engages in the insurance and reinsurance of property and casualty risks business.

    Can you think of any disasters lately???

    I sure can - could that be the reason of lower than ever valuation?

  • Report this Comment On June 22, 2011, at 7:37 PM, prginww wrote:


    Didn't Spain banned smoking in bars this year?

    What a great opportunity to make extra revenue for a cash-strapped country by enforcing the law...

    and don't give me that addiction BS - I've smoked close to a pack/day for over 10 years (Marlboros, ironically) before quitting 7 years ago. Those who say "I'm addicted" just don't really want to quit.

    Microsoft p/e will likely to change - and not for the better. But that's my prediction and you guys more than welcome to invest in it for retirement...

    What history teaches us is that most technology companies are not 20-30 year investment - it's hard to stay on the top. Netscape anyone? How about AOL? Even mighty IBM switched gears and now mostly is a solutions provider.

  • Report this Comment On November 18, 2011, at 2:46 AM, prginww wrote:

    The mention of morality related to tobacco sales makes me feel the need to interject. I have stomach cancer and I take Morphine and Hydrocodone for the pain, but I also take them because they bring the exact same gratification that tobacco use gave me before I quit using it (haven't used tobacco for 3 years now).

    All "addictions" are the same, they bring fulfillment to a need for gratification. Could be food, alcohol, nicotine, sex, money, power... they are all addictions, and as such, they are all the same. Everything is relative, and there is nothing immoral about helping others get daily gratification from whatever source it may come.

    Value of life is much the same as value of investment. There are many ways to look at it, analyze it, realize it's returns, and know it's real value. Who knows? A shorter life with a constant return of gratification may have a greater value than a longer life with a constant feeling that urges are never gratified.

    Gratification that comes from power, money, food, sex, and a host of other sources, may be just as damaging to self and others as tobacco use. Coming from a man who smoked for 40 years and currently has cancer I say - STOP playing silly mind games about morality - if an investment makes sound financial sense - go for it and make some money.

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