Fighting Inflation With Dividend-Paying Stocks

With bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. yieldsYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. still historically low, are dividend-paying stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. the answer for income seekers? Can they be used as a substitute for bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates., and what role should they play in an overall portfolio? Here’s what Vice President and Portfolio Manager Steve Johnson said in our recent webinar,  Booster Shots, Market Shocks and the End of Fed Intervention:*

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Steve Johnson:

I love income and I love dividend-paying stocks. One reason: DividendA cash payment to investors who own stock in the company. growth can be a tool to fight against inflation. Many of the companies we invest in have the ability to raise those dividendsA cash payment to investors who own stock in the company. year-over-year, so dividend-paying stocks are a good way to get income as well as capital appreciation.

But should they be used as a substitute for bonds? As much as it pains me to say it, I can’t go there, because you definitely need bonds in your portfolio. Everyone right now is scratching their head saying, “Gosh, what do I do in this environment where the 10-year Treasury is paying 1.6%?” Unfortunately, the effect is that everyone is moving out on the riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. spectrum.

That investor who might have been conservative or comfortable with a 50/50 (50% stocks, 50% bonds) portfolio? Now they’re adding things like crypto and dividend-paying stocks. The risk side is increasing in their portfolio.

I still believe that dividends are crucial as an anchor for someone’s portfolio. But I also understand there’s risk there (as with any stockA financial instrument giving the holder a proportion of the ownership and earnings of a company.), so I don’t believe dividend-growth stocks can be a full substitute for bonds. Income is really the focus right now, and there are ways to increase it within the bond side: High-yield bonds, convertible bonds and real estate are some examples. Understand that there are options, but we always want to be cognizant of the risksThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. out there.

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