Investors best served by not having all eggs in one basket
Now and then journalists contact me and other financial experts to supply background information for various stories. One asked whether investors would be better served by selling their bonds and instead buying dividend-paying stocks. I never answered that question because my own work was taking up too much of my time that day. But since it is a good question, I thought I’d answer it for y’all.
Regular readers of this column know that “it depends” is a pretty common answer from me, so it should not have been a surprise. And in this case as in most others that’s because all of you are different. What works for one won’t work well with another.
If I had to choose between having a portfolio of 100% bonds or 100% dividend paying stocks, I’d probably choose the stocks. Probably? Yes, it even depends for me. For most of my goals in life, the stock choice makes the most sense. I know that stocks give a better total return (growth plus income) than bonds do. I also know that dividend paying stocks tend to increase their dividends across time. And generally dividend paying stocks are less volatile than non-dividend payers.
In fact, with the Federal Reserve still keeping interest rates down in order to stimulate the economy, bonds, CDs, and the like pay a pitifully small amount of income. I’d hate to have to live off of it. And, given how low interest rates are, eventually they will come back up. When they do the value of existing bonds will go down—so much so that it might give a negative total return in some years.
But I also know that in 2008 dividend paying stocks plummeted. In fact, in many cases they went down more than average. That’s because financial and real estate stocks tended to pay pretty good dividends, and we all know where the financial crisis originated. Things were so drastic for businesses that many companies reduced or eliminated their dividends completely.
Imagine if I needed income for little things like food, clothing, and shelter and my income stream from dividend paying stocks went down, what could I do? Selling them to buy a bond or CD wouldn’t be too good since their prices had plummeted. Yes, stocks came back and dividend paying stocks led the way. But during the downturn how was I going to eat? That’s why I don’t consider dividend paying stocks to be a substitute for bonds.
This article was published under the title "Don't put all eggs in one basket" in the Wichita Falls Times Record News on November 30, 2014.