Tags: Dividend income, Investments, Stocks, bonds, Stocks market, Financial plan

Best Dividend Income: Dividend Stocks vs Bonds

1 August 2020

Dividend Stocks Vs Bonds

Two types of most popular investments which can provide you with dividend income or interest income in your retirement years are stocks and bonds. Both of these can help you subsidize your living expenses in your retirement. But before you decide to invest in either stocks or bonds it is important to understand exactly what they are and what advantages and disadvantages each of them has.

 

Venturing into the stock market and deciding which stocks to buy should only be done after considerable research and preferably with the aid of a financial planner, who will give you advice on various factors that may affect your investment (e.g. volatility). This article will discuss some of the main differences that exist between dividend stocks and bonds, which instead of dividend income pay interest. This will hopefully enable you to make an informed decision about your financial future

 

Before we begin comparing, let us have a look at the brief descriptions of these two types of investments

Dividend income, Investments, Stocks, bonds, Stocks market, Financial plan

1. Dividend stocks and bonds

Millions of people invest in the stock market and use dividend stocks to finance their lifestyle. Dividend stock provides its investors aka shareholders who own a part of a company receive dividends from that company. These dividends are paid to the investors from company’s profits (after it has made all the necessary payments).

 

Essentially, when you buy a stock it means that you own a stake in the company, and the more lucrative the company’s assets become over time the higher is the payout to the investors aka shareholders. Deciding which stocks to buy can be an intimidating task and requires careful consideration.

 

Majority of bonds are fixed rate investments (typically they are sold in increments of $1,000 or more). This means that, for a predetermined period of time, the governments and corporations borrow from investors and promise to repay the debt in the future. Thus each investor earns a set, predictable return, called interest. It is noteworthy that bonds, similar to stocks, trade on markets, which means that their prices may fluctuate depending on supply and demand.

 

A bond which is trading at above par value when you buy it reduces your yield, whereas a bond which is trading at below par value increases your yield.

 

Now that we are familiar with these two types of investments let’s have a look at the key differences between them.

 Dividend income, Investments, Stocks, bonds, Stocks market, Financial plan

The capital stack consists of total capital invested in the business; and the most notable difference between dividend stocks and bonds is their position in the capital stack. Capital stacks typically include: senior debt, mezzanine debt, preferred equity and common equity. Typically bonds are the obligations that get paid first, hence their senior status in the stack. Common equity (which includes dividend stocks) gets paid last, hence the junior status in the capital stack.

 

As well as this bonds that have been issued by stable governments and corporations usually have low default rates and higher credit ratings. As a result of all the aforementioned factors bonds are considered to be lower risk investments. However this relatively low risk means that they offer relatively low return.

 

Bonds are thought to be less volatile than stocks, however, this is not always true. There is no inflation protection on fixed rate bonds, unlike bonds, stocks grow their dividends faster than inflation.

 

All things considered, why do some people still choose to invest their money into bonds? The reason is that allocating part of one’s portfolio to bonds can help reduce volatility which can somewhat reduce the financial damage if the stock market is on the downturn.

Despite the risk associated with them, even some of the most conservative investors want to buy dividend stocks. That is due to the fact that historically stock markets have offered better returns on investment. And even some investors who are in the retirement years have scouted for the best stocks to buy.

 

However, dividend stock does have a higher price volatility than bonds do, which makes many retirees feel understandably nervous about buying them. It can be scary, especially when you don’t have a steady source of income such as a full-time job to rely on in your golden years. However, succumbing to the fear and investing exclusively in bonds may not be the best solution.

 

For that reason investors typically choose to diversify their portfolios with various stocks and bonds. So what does a good mix of assets look like?

2. A mix of dividend stocks and bonds.

Deciding on the right mix for you is your personal decision which ideally should be made with the help of a financial planner. There are many variables at play here (such as health, risk tolerance, income source, life expectancy) which the financial professional will take into consideration while advising you on the contents of your personal portfolio.

 

Your financial planner may advise you not only on the best bonds and stocks to buy now but also on what may happen in the future. For example it is predicted by some that bond incomes are likely to diminish over the next decade, especially if the interest rates and inflation rise.

 

To conclude, there is no “one size fits all” approach when it comes to creating an individual portfolio. What works for one investor may be unacceptable for another one. Both dividend stocks and bonds have their pros and cons, so the appropriate mix of these assets can be determined by taking into consideration a combination of variables, and will depend on your personal short-term and long-term goals. 

 

Given how important it is to make the right decision in order to ensure a cushy retirement, it is advisable to consult an experienced financial planner. Boracchia Wiviott Wealth Partners will help you assess your individual needs and help you create an investment strategy that best satisfies them. Contact us today here

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Lea Wiviott Boracchia, Co-Founder, FinancialPlans.Info and InvestingProfits.Pro, both apart of the renowned Boracchia Wiviott Wealth Partners

We are a registered investment advisory focused on accessible wealth planning for everyone. Our mission is to help women, men and people of all ages, races, locations, and anyone plan and secure their most successful future. We were originally established in 2005 by way of 3 firms before my husband Marc and I registered our independent advisory in California.

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