When considering this investment decision, you may want to ask yourself:
“What purpose do bonds serve in my portfolio”?
Typically, core bond positions within a portfolio are designed provide non-correlated returns when viewed against equity positions, thereby providing a ballast to ones overall portfolio during turbulent market times. However, in order to achieve this non-correlation, your bond portfolio needs to comprise higher quality bonds and would need to avoid below investment grade debt (generally speaking). Unfortunately, higher quality bonds do not yield a high payout but, instead, yield a relatively low payout due to their perceived low risk (as with equities, less risk within the bond market means less reward or yield). Hence, why investors ask themselves if they should use dividend paying stocks in place of bonds because some dividend paying companies have similar or higher yields than commonly employed bond funds, are typically deemed more stable (or less risky) than other stock investments, and may additionally benefit from the upside potential of the stock price. Sounds reasonable, doesn’t it?
Why might dividend paying stocks in place of bonds not be a good idea? Here are two potential considerations:
stocks (including dividend paying stocks) exhibit a much higher standard deviation than high quality bonds, i.e., their returns can vary greatly from one year to the next - stated another way, stock returns are much more volatile than bond returns (and volatility is not your friend in a down market); and
dividend paying stocks exhibit a higher correlation with stock market movements than do bonds, i.e., dividend paying stocks are more likely to lose value when the overall stock market declines, whereas high quality bonds should lose less value (and possibly even gain value).
If you have question about whether it is better to purchase dividend paying stocks or bonds, please feel free to contact Intelligent Investing at www.mynmfp.com/new-clients for a no-obligation consultation.
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