Taking stock of year-end advice

In the past week I’ve read half a dozen articles on major financial websites urging yield-starved investors to switch from bonds to dividend payers. The pitch? That you can get a higher yield with less risk with dividend-paying stocks than you can with bonds, whose yields are depressed as flight-to-safety investors bid up their prices.

The numbers seem to support that view. The yield on a 3-month Treasury is 0.01 percent. The 10-year yields 1.87 percent, the 30-year a mere 2.85 percent. Savings accounts earn 1 percent at best. At the Vanguard Group, which keeps fees low with a religious fervor, the prime money market fund carries an SEC yield of 0.02 percent. That makes the dividend yield on the S&P 500, now 2.1 percent according to Fortune, look like a windfall.

That’s a great deal, unless you want to preserve your principle, or you’ve forgotten the collapse of both the tech and housing markets. The chance of losing money in a savings or money market account is slim. The chance of losing a significant chunk of your stock fund is much greater. Just look at the performance of the markets in 2011. Writing in USA Today John Waggoner says that the S&P 500 index has lost 1.4 percent this year. It gets worse for the average diversified U.S. stock mutual fund, down 5.9 percent to date, according to Lipper.

Not so for the dividend payers. In 2011 the 100 stocks in the S&P 500 with the highest dividend yields are up an average of 3.7 percent before their dividend payouts are calculated, according to Birinyi Associates (as quoted in the Wall Street Journal). There are two problems with using that analysis to power your portfolio. You can harvest those profits only if you constantly screen for those stocks, a job better left to the professionals. And the numbers disguise higher expenses for managed funds. The average mutual fund charges about 1.3 percent a year. Savings accounts charge nothing.

That so-called stock-market bonus—you can book capital gains as well as dividends—makes for a tantalizing but specious argument. Stocks and stock funds will lose money. Savings won’t. Neither will individual bonds held to maturity. If keeping pace with inflation is an issue, TIPS held to maturity should answer the call.

Comparing stable assets to variable ones does investors a disservice. Financial writers and advisors should compare similar assets and decide which ones offer the best yield in that class. Anything else, as Ecclesiastes wrote, is a striving after wind. Or the latest end-of-the-year investment guide.