Dividend Chasers Should Think Twice: Corporate Bonds May Make More Sense

The biggest investment mistakes that I have ever made - from Xerox to Friedman Billings to Canadian oil trusts - have all involved the chase for dividends. I've been reading Billytickets, and while he makes some good points, I believe that investors might be better served to chase corporate bonds in this environment than dividend stocks.

A dividend yield is one reason to invest in a stock, but it shouldn't be the guiding reason.  A corporation can lower (or eliminate) their dividend easily (by the way, I am still amazed that TARP funding was provided without any commitment from the banks drop dividends).

If you need the yield, you will be better off taking a hard look at corporate bonds.  These bonds, most of which trade at a discount, provide high yields to maturity - in many cases, higher than the equity yield.  Their yields are contractually insured, unlike dividends.  And, of course, these bonds provide greater security because bonds will always rank higher than stocks in terms of a liquidation.  The downside is that there is never the same room for appreciation in bonds.

As a rule, Invest in equities for appreciation.  Invest in bonds for yield.

Jason Rodgers
Jason Rodgers: Jason Rodgers was an experienced research analyst for a major bank prior to retiring to run his own investment consultancy in beautiful Lihue, Hawaii. Jason contributed articles to BestCashCow from 2008 to 2014.

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Comments

  • billytickets

    December 21, 2008

    Corporate bonds are excellent investments :In the right companies. Altri has some attractive corporatebonds.But I have had great luck with the common stock PURCHASED at the right price. I have achieved financial SOLELY from allocating capital in thepast 22 years. I have invested in many unconventional things but LOAD up when I get that"fat pitch".

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