Are you investing your funds to create a retirement portfolio for your father or its your fathers retirements funds which you are investing?
No doubt the debt is high. But their interest coverage is more than 3. So I guess that provides a good enough margin of safety for the company to keep paying dividends.
Combination of both.
Zero interest rates are for a few, very short term debt instruments with practically no risks. While there a wide range of instruments available which offer a decent return. eg. corporate bonds, Municipal bonds, CDO etc. Also, these nations have low inflation due to which low rates of return make purchasing power grow.
like me! but do have some fixed income component in whatever form for peace of mind. trust me, it helps.
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How do you rate an annuity from insurance firms as fixed income compared to say an FD? In case of annuity the capital is locked ( not sure if there are products where we can voluntarily break the policy) but interest rate is fixed for life. In India, gradually over long term, interest rates will surely decline just like USâŚso how is the idea of locking your interest rates early? Thanks
Problem with this is the payments wonât grow with inflation. If you choose the plan with growing annuity the first payout will be less.
Problem with the growing annuities offered in India is that it is caluclated by simple interest formula instead of compund interest. This will end up making very huge difference when duration of payments expected to be recieved is in decades.
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I think this problem comes into picture when we compare annuities with equitiesâŚhere I am comparing annuities with Bank FDs/gov backed bondsâŚas these two are the only sure (to the maximum extent possible) fixed incomes.
Moreover in the very long term, both inflation and interest rates in India will come down, but interest rates of annuities locked in will remain fixed. So the trade off seems better as compared to other sure fixed income candidates like an FD/Gov bondsâŚThoughts welcome
Does non-growing annuities offer compound interest rates?
Annuities (all the various options) given in India is a bad product by default. It gives very low real return and no liquidity in case of emergencies. If one really needs to fix a steady âincomeâ for a very very long time then it is just better to buy 30 year government bond. It can be sold in secondary in case of emergencies (albiet would be difficult). Also the annuities returns arenât higher than the 30 year government bonds.
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Thats a very interesting viewpoint. By âvery low real returnâ what do you mean by the real return? Is there any hidden caveat in annuity products? Say if interest rate is locked at 6% for life then what is the âreal returnâ? (Pls do not mention inflation point as I understand that and thats applicable to all instruments)
Regarding 30 year Gov bonds, what is best way to buy them? I would assume gov launch them limited times in an year with some window time period? What is the typical return offered and is it fixed for 30 years?
Thanks for your thoughts!
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Real return = Return minus inflation.
Yes, inflation is applicable to all instruments. But, an important point is all short to medium term debt instruments track inflation. So, real return is usually in the range of plus minus 2% for short to medium term debt instrument (say time frame less than 5 years).
When investing in very long term (in this case for decades), if the inflation gets in the range of low teens (like it was in 1990s) for a short duration (even 2-4 years) then it would significantly reduce the value of the prinicipal. So it is usually better to invest in medium term debt instrument and reinvest at maturity. Unless, one is very sure that there wonât be any drastic hike in inflation in next few decades. But personally, I wouldnât bet on that.
And yes, interest rate is fixed for 30 years. You will receive interest semi-annually or annually. One way to buy such bond is from Zerodha. Yes, gov launches them few times in a year. When I calculated couple years back, the interest rate of 30 year Gov bond was giving 0.25% to 0.5% more interest than the annuity. Not sure, about the current scenario but I guess it wouldnât be very different. And there is a risk of the firm going bankrupt with whom you are buying the annuities and no such risk involved in buying Gov bonds.
Typically, higher the duration of bond, higher is the return.
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Just to add - Higher the duration of the bond, greater the volatility. This is measured as the Modified Duration. If you hold the bond till maturity, this volatility should not matter. But if you plan to sell, then volatility can affect your returnsâŚ
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Hey, looking at your target yield, have you considered something safer like fixed deposits or government securities? Would that not work in your case ?
As far as I have seen dividend investing works beautifully in American situation because their low risk asset yields are very low (1-2%). But this is not the case in India. 30 year government bonds have a yield of 6.7% if I recall correctly. Have you considered investing in them? Imo they would meet your yield targets on a post tax basis.
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I have been investing in India for a long long time
The rupee depreciates taking away most gains as cost of living increases
Indian banks now allow overseas remit and investment
You should also consider world equity index or USA entire market index
Presently due to governments printing money, gold based mutual fund is also great
I understand your father wants to invest and forget however any company can have a bad run. Colgate has a tough time from pepsodant and Patanjali
I would also put 50pc in equity and 50pc in bond
Every April (as people sell in summer months and come back in August To equity markets historically ) I would rebalance
So if debt has increased because of gains, I would sell some and invest in equity and vice versa
Your fathers portfolio should draw down for pensions not more than 4pc
Historically this has ensured perpetual maintenance after taking into consideration inflation
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The good thing about dividends is that they grow as the company grows. In case of government bonds, the interest which you get is fixed and wonât increase further. There will be a huge difference between the interest received from govt bonds & dividend from great companies, which for me makes dividends a safer bet.
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I see. I think the key consideration you have is of growing yield. The yield might be 3-4% today but itâll become 6-8% in a matter of say 5-7 years when the company profits grow.
That does make sense to me, I do want to point out that it might require some active management to keep it that way: that is to ensure that your portfolio always have great dividend payers whoâs dividend payment increases over time.
I also suggest checking out this YouTube channel:
His core portfolio (for himself) is a dividend growth portfolio and you might be able to learn a lot from this channel in terms of how he picks the stocks , what he looks for, when does he sell them etc.
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