3 Arguments For Investing in Dividend Paying Securities Instead of Fixed Income Securities
By Chris Blanchet
There are multiple ways for people to invest in low risk securities that pay dividends. Possibly one of the most popular ways is through dividend investment funds. And while the prospect of getting into the market during periods where there a lot of market uncertainty as well as economic uncertainty, there are some clear benefits to investing in dividend-paying securities today rather than waiting for the economic recovery to get under way. Here are three reasons why you should begin investing in dividend-paying securities.
1. Growth. Unlike bonds which will experience price pressure once rates start climbing, securities will actually enjoy price appreciation. Look at General Electric's stock, for example. When the economy kept this company for reporting profit growth for nine straight quarters, the stock price dropped by a staggering 83% from its highs. Some of this drop could be attributed to the company cutting its dividend (temporarily) but when GE reported 48% profit growth, it not only raised its now-restored dividend by 20% (meaning one's income would increase) but its stock price also rose. As economic forces push interests up, bonds may suffer but the companies that benefit from stronger economies gain in terms of profitability as well as stock price.
2. Better Diversification. Unlike bonds that are excessively expensive to purchase, a lot of dividend-paying securities are not. This allows for greater diversification for folks who would prefer to hold individual shares (instead of investment funds); a $100,000 portfolio can hold more actual shares if it is invested in securities than a portfolio of actual bonds. Diversification is known to be instrumental in reducing risk associated with fluctuations that result from individual company activities (such as bankruptcy, insolvency or other management activities).
3. Alternative Investment Options. Although almost all bonds will have a margin value to allow for leveraging, using derivatives to enhance income from bonds is a little more difficult than using margin and derivatives on stocks. And there derivative trading is more transparent and available to stock holders who like to manager their investments on their own, investing in dividend paying securities instead of bonds in order to take advantage of derivative strategies to enhance income makes the most sense.
The three arguments above for investing in dividend paying stocks instead of interest paying bonds are really just three points that range from very common (growth and diversification) reasons to very complicated reasons (such as enhancing returns through derivative investments). There are many other compelling reasons during periods of economic recessions and those early recovery stages to invest in dividend paying equities instead of interest paying fixed income securities.
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Chris has more than 17 years of financial services experience. He currently manages a Debt Blog [http://www.howtorepaydebt.com] at HowToRepayDebt.com.