Interest rates, long predicted to climb, are still microscopic. If you buy bonds to create income you have to tie up your money for 20 years just to get 3% on a US Government Treasury* – pathetic. With dividend paying stocks, you won’t have to work hard to match that rate plus they provide the opportunity to grow your income and your capital over time. Are dividend paying stocks a no-brainer? Is the bond market a sand trap? Lets take a look.
Dividend Paying Stocks Are Great But They Have Drawbacks Too
Dividends can certainly replace bond interest and are taxed at preferential rates. On top of that, many companies increase dividends. Bond income (at best) stays the same. In 2014, almost 1100 U.S. companies did increase their dividends.
Try getting a bond to increase the payout – no such luck. And to top off that, stocks can reward investors with price appreciation.
But it’s not all sweet potatoes and marshmallows friend. Dividends can be reduced, suspended and/or eliminated. Stock prices can fall. At least with bonds, you know that you’ll get your money back (assuming the company stays in business of course) when the bond matures.
A Potentially Large Problem With Dividend Paying Stocks
I believe there may be even darker clouds ahead for dividend paying stocks and the media has for the most part overlooked this problem. When you buy dividend paying stocks you are in the market with people who are interest rate sensitive. When rates eventually do go up, many of those investors could dump their dividend paying stocks for higher paying interest yielding bonds. And if there is a max exodus form the dividend paying stocks, their prices will drop like a lead pancake. That’s an ugly picture you don’t want to be in.
A Better Option – Equity Growth, Hold The Dividends
There are many ways to squeeze income out of equity and you don’t always need dividends to do that. That’s right. Even if your stocks don’t throw off income, you can still withdraw 3% or 4% of your balance and probably grow your assets at the same time. How?
Well, if your portfolio increases in value by 9% one year (for example) what’s wrong with taking out less than half of that? There will be years where you make less than you withdraw to be sure. There will be years where you lose money and still take your 3% or 4%.
That’s OK. There will be other years where you withdraw 3 or 4% but earn much more on your portfolio.
You can use equity to create income if you do this over many years and stick to a proven and moderate investment strategy. For the right investor, this could be far better than owning bonds or dividend paying stocks.
Are you buying dividend paying stocks? Are you sticking with bonds? Why or why not?