Dear Mr. Berko: I'm 57 and have $129,000 in cash in my IRA. My broker suggested that I invest in five different $25,000 pieces of A-rated corporate bonds with 20-year maturities that would yield 4.0 percent. He said he won't add a commission on the price I pay for these bonds. This $129,000 is a little less than half my IRA value and the other half is invested in an index annuity. The five different bonds will cost me a total of $124,325. This looks safe because each of the bonds is rated A and the income is guaranteed. I've enclosed this list for your comments. — SK, Buffalo, N.Y.
Dear SK: Don't you dare! At age 57, you've to be dumber than a two-tailed wombat investing $124,325 in five $25,000 face value bonds with a 20 year maturity, yielding about 4.0 percent. Bonds, even well-rated bonds, are a lousy investment for most civilians including you. But they're wonderful investments to sell because the huge hidden commission gives him a nice payday.
Your brokster is right. He won't add a commission to the price you pay for those bonds because the commission is included in the "price you pay." This mountebank ought to be pilloried, painted yellow, and flogged for this greedy and unsuitable recommendation. I also recommend that his tongue be spliced by an incompetent surgeon! If you buy those issues, you'll pay a substantial and hidden fee; sometimes as high as 4 percent of the bonds' face value. Those bonds are part of your broker's trading inventory so the price to you is "marked-up" three to four points. And since the commission is "hidden" or added to his firm's cost of the bond, you could be paying as much as $5,000 and never know it. That is unless you have the ability to call another broker and compare prices. And if you do, you'll be mad as heck, as well as "gabberflasted." I checked those five bonds with a Merrill trader I've known for years, and suffice it to say, a Merrill customer can buy the same bonds for about $121,000, including commissions. And that should be an important difference to you. It also suggests that your broker is a crook and the brokerage that employs him endorses his selling tactics.
If you buy those five different corporate bonds with a 4 percent yield, you should get checks every six months for $2,500. Those 40 interest payments of $2,500 over 20 years are carved in stone and never change. And when those bonds come due in 20 years, you'll have received $100,000 in interest income plus the $125,000 face value of those bonds. And while those years pass slowly, you may note that the prices of prosciutto, peaches, pasta, Pringles, pizza, plums and pickles have doubled in price. And when you're 77, you may also realize that your 20-year $124,325 investment has suffered from the inflation disease and will only buy you about $70,000 worth of parmesan, pita, pears, pumpkins and Pierogies. Not good, that.
Consider owning issues like American Telephone, Southern Company, HCP, Inc., W. P. Carey, Chevron and others that have current dividend yields of 5 percent or more and have increased those dividends on a regular basis for years on end. I've been preaching this philosophy to readers for over 40 years. Invest $125,000 in this five-issue stock portfolio yielding 5.4 percent and earn $6,750 in dividend income the first year, which is 35 percent better than $5,000 in annual bond interest. And if those five issues increase their dividends over 20 years by a meagre 2 percent annually, your cumulative stock dividends will have grown to $160,000 annually versus $100,000 in bond interest. So with dividends growing at 2 percent annually, on the 20th year those five stocks pay you over $10,000 in dividend income versus just $5,000 from the five bonds. And the future value of these five income/growth stocks could reasonably double to $250,000 by the year 2035, when you're 77.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.