Dividend Stocks vs. Bonds

Dividend Stocks vs. Bonds

This week’s reader question:

What’s your perspective on dividend-income stocks? With interest rates and bond yields as low as they are, do they serve as a good alternative to bonds?

Bonds and dividend-paying stocks both generate passive income to fund retirement spending and achieve other financial objectives. Yet, they are two distinct investment vehicles with differing risk profiles.

The trade-off is primarily about risk: Bonds are lower risk when compared to stocks, which also means they generally offer lower yields and returns. While dividend stocks are riskier than bonds, they provide a fairly reliable source of income plus the possibility of capital appreciation over time.

Of course, not all dividend stocks are created equal. I’m a big believer in dividend-growth stocks, which offer a lower yield compared to high-yield dividend stocks but grow their dividends consistently every year.

Charlie Toole, CFA, CFP, is Vice President, Portfolio Manager at Adviser Investments.

Dividend-growth stocks have yields that are comparable to bonds. For instance, the Vanguard Dividend Appreciation ETF has a yield of 1.6%. This is better than the yield on the 10-year Treasury bond (currently at 1.3%) and slightly lower than intermediate-term corporate bonds (currently yielding 2.0%).

The real power of these stocks in a portfolio, compared to bonds, is the growth of your income.

For instance, given today’s inflation concerns, many income investors are worried that their purchasing power will erode as costs for everything from food to gas to used cars have been rising. While the income from a bond remains constant, dividend-growth stocks increase their payments to investors. Over the last year, the top 10 stocks in the Vanguard Dividend Appreciation ETF posted a median dividend-growth rate of 9%—that’s almost twice the current rate of inflation.

In addition to growing income, dividend-growth investors participate in the growth of the company’s stock price over time. So, while you’re collecting that growing income, your principal investment is also increasing.

That makes dividend-growth stocks a no-brainer choice for those seeking income. But before you sell all your bonds, keep in mind that stocks expose you to much greater short-term risk. Bonds are a buffer in your portfolio when the stock market drops. While dividend-growth stocks have historically declined less than other equities, their share prices will fall when the overall stock market does. And they’ll fall much further and much faster than bonds.

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Adviser is a full-service wealth management firm, offering investment managementfinancial and tax planningmanaged individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.

This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Past performance is not an indication of future returns. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed. Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio.