Warren Buffett invests in a way that he can sleep easy at night. Here are some options that are on the safer side, but still have an opportunity for yield and in some cases growth.
With stocks down and bond yields either at an all-time low or nearly so, fear is high as is indecision. People just don’t know where to put their money. For those that are electing to invest in the market rather than sitting on cash here are some possibilities.
Though these selections are on the safer side, there still is an opportunity for yield and in some cases growth.
Minimize dividends now as they are expected to be taxed significantly higher in the future. One way to do this is to choose growth stocks that pay little or no dividends. Cash can be positioned in tax-free vehicles (if your tax category warrants it) or otherwise short-term bond funds.
Vanguard Total Stock Market VTSMX represents the broad U.S. market, which has consistently been a good bet over time. Its dividend is 1.64%.
International stocks have tanked, and though they will eventually come back it could be a long time. One broad based option along these lines is Vanguard International Growth VWIGX with a yield of 1.81%.
Small cap growth is in the toilet right now as well as international, but history suggests this it is where the maximum bang for the buck is found over the long term. Vanguard small cap value VBR fits this category with a yield of 2.01%.
A short-term municipal fund that pays a 2.05% dividend that is free of federal income tax is the Wells Fargo Advantage short term municipal bond fund STSMX. This is one way to glean tax free yield in a relatively safe vehicle, though it dropped 8% just before January, 2009. For greater safety but lesser yield, VWSTX consists of higher quality municipal bonds. Its yield is 1.14%.
If a municipal fund is not needed due to a low tax bracket, BSV, a high-quality, short-term bond fund is one choice. Its yield is 1.83%.
For Tax Advantaged Accounts
High dividend achievers work whether they are composed of bonds, stocks or a mixture. Stock high dividend achievers add some potential for growth.
The Wellesley funds are good options because their dividend is rich and not taxed in an IRA, Roth or other tax advantaged vehicle. The more aggressive VWELX consists of about 60% stocks and 40% bonds with a dividend of 2.89%. The more conservative Vanguard Wellesley Income Fund VWINX is composed of approximately 60% bonds and 40% stocks (the opposite of VWELX) with a yield of 3.44%.
Power shares international dividend achievers are another option though the fund is composed of international stocks, which means that it is more fragile right now than what continues to be the gold standard, U.S.-based companies. Since it sells at a discount, it may be a good long-term bet. The symbol is PID and the yield is 3.19%.
Another option is an inflation-protected bond fund, TIP. Its current yield is 3.70%. Vanguard high-dividend yield VYM is yet another choice for dividend income. It consists of common stocks that pay a high-dividend yield (not bonds). Its current yield is 2.78%.
For total safety, individual U.S. high-grade bonds are likely the best, but they pay so little in yield that many investors are not be interested in them right now.
These choices provide some return with less risk than other options. Warren Buffett is one person who might be interested. He said in the Berkshire Hathaway 2008 Chairman's Letter: “When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.”