Dividend Investing - 3 Good Reasons to Own Dividend Stocks Over Bonds
By Lee Franzen
Dividend investing is a strategy used by many investors, often with one of two main goals - to provide current income by investing in companies that pay a regular cash dividend to share holders, or to diversify their stock portfolio's performance by attempting to achieve gains through both capital appreciation and cash income. For investors looking to add income to their portfolios, the decision usually comes down to trying to achieve this investment goal by purchasing bonds or dividend paying stocks. While bonds are considered a safer investment on the surface, due to their promise to return the principal invested in them when the bond matures, dividend investing in the right companies may be a better choice.
One reason to choose dividend investing over bonds is that while bonds can provide a fixed cash payment over time, dividend stocks can increase their payments to investors. This property of properly chosen dividend stocks has two benefits - first, as your dividend payments increase, they can offset the effects of inflation, and second, your effective yield increases as the increased cash payouts are measured against your initial investment in the stock.
The next reason dividend investing can be superior to bonds is that dividend stocks can increase in value over time, while bonds have a fixed underlying value that will be returned when the bond matures. This again acts as a good hedge against inflation, because the principal invested in a bond loses value at the compounded rate of inflation over the life of the bond. Many bond investors do not consider this when they put their money into the bond, but if you look at a ten year period, like the years 2000 - 2009, which were very tame, the impact of compounded inflation on the real value of the principal of a bond over that period would have been -21%! Think about that for a moment, a conservative investor that bought a 10 year $10,000 bond at the beginning of the year 2000 would have his $10,000 returned at the beginning of 2010, but the dollars would only be worth $7,900 compared to when the investment was made! With dividend stocks, the price of the security can go up to protect against inflation.
The final reason to look at dividend investing is the affect that dividend income can have on buffering a portfolio's returns when dividend stocks prices move down. While the price of the stocks may be moving down, the cash payments from dividends keeps coming in, so the investment portfolio does not go down as much as the value of the stock price decrease.
Dividend investing is a popular strategy for both investors that need current income, as well as those that are looking for a more diversified source of gains in their investments. You should consider dividend stocks for your portfolio.
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