CD vs Dividends on Stocks

[RetireBy90]

I'm curious on what your thoughts are on putting extra $$ into a CD or dividend stocks. I know, it would depend on what asset allocation you are looking for, a stock would not qualify as a fixed income from a traditional view. However, if I can get 3.5% on a top tier stock or 1.5 on a CD.

Exxon - 3.69%
Verizon - 2.5%
GE - 3.2%
AT&T - 5.6%

I'm sure there are many candidates for the list, but if I can get 3.5% or so in a variety of companies (above is average 3.7%) how about I forget what the equity price does and claim my 3.7% dividend

Anyone buying dividend stocks for fixed income ?

 

[sanfanciscotreat]

I am getting 3.62% tax free on a state municipal income fund.

 

[RetireBy90]

good point. Lots of risk for .08% even without figuring in taxes

 

[Sunset]

Your examples are fairly good showing dividends pay more than many CD's.

If you absolutely didn't need the principal for 5 years, then for income its a good idea, but as you can see the net return in 2016 would be about -10% so far.

For a short term thing of 2-3 years, I would use CD's, yes the rates are low, but you get back all your cash at the end of term.

 

[Whisper66]

Anyone buying dividend stocks for fixed income ?

That's exactly what I have done with a large amount of my cash / bond assets. A couple caveats though. It's much more interesting to me as a strategy in times like today where (a) some stock prices are reasonably low (b) dividends are pretty similar (or better) verses bond returns AND most importantly (c) you don't need the principle anytime soon. That allows you to sit on the stock until it's price appreciates, and in the meantime, collect dividends.

Of course this is higher risk than sticking with bonds. Never know if a stock will totally collapse or if the company will cut dividends. Those risks are much higher than with bonds. So I stuck with very strong blue chip companies, mostly dividend aristocrats. I also kept a couple years of expenses in bonds just in case......

Good luck with whatever you chose.

 

[capjak]

I'm curious on what your thoughts are on putting extra $$ into a CD or dividend stocks. I know, it would depend on what asset allocation you are looking for, a stock would not qualify as a fixed income from a traditional view. However, if I can get 3.5% on a top tier stock or 1.5 on a CD.

Exxon - 3.69%
Verizon - 2.5%
GE - 3.2%
AT&T - 5.6%

I'm sure there are many candidates for the list, but if I can get 3.5% or so in a variety of companies (above is average 3.7%) how about I forget what the equity price does and claim my 3.7% dividend

Anyone buying dividend stocks for fixed income ?

Nice list but isn't Verizon dividend 5.1%.

 

[RetireBy90]

That's exactly what I have done with a large amount of my cash / bond assets. A couple caveats though. It's much more interesting to me as a strategy in times like today where (a) some stock prices are reasonably low (b) dividends are pretty similar (or better) verses bond returns AND most importantly (c) you don't need the principle anytime soon. That allows you to sit on the stock until it's price appreciates, and in the meantime, collect dividends.

Of course this is higher risk than sticking with bonds. Never know if a stock will totally collapse or if the company will cut dividends. Those risks are much higher than with bonds. So I stuck with very strong blue chip companies, mostly dividend aristocrats. I also kept a couple years of expenses in bonds just in case......

Good luck with whatever you chose.

Thanks for the feedback. Currently my plan is to buy a 5 year CD every 6 months for living expenses or unexpected items first 7 years of FIRE. Worked better when I was getting 3.5%. So now 6 years into it I have original CDs maturing and scrambling to figure what to do with them. I think I'll keep 8-10 of them in best CD rate I can find, kind of like emergency fund and I've started DCA into Exxon as the first of my dividend stocks.

 

[RetireBy90]

Nice list but isn't Verizon dividend 5.1%.

my bad, I was doing lookup in yahoo finance, and copy/paste into post. Discount Double Check

 

[Gone4Good]

Nothing wrong with buying dividend stocks, but no, div stocks are absolutely not a replacement for bonds/CDS.

Saying "I can buy AT&T for the yield and forget about the price" completely ignores the non-zero possibility that AT&T can cut it's dividend and also that both its price and its dividend can go to zero.

So buy stocks if you want stocks, but the way you've framed the question sounds an awful lot like incurring additional risk to reach for yield. That's a classic investment mistake that has led plenty of portfolios to ruin.

 

[mathjak107]

interest is on top of principal when paid . dividends are a return of principal when paid .

they are not the same thing nor do they act the same way .

if you spend your interest you still have the same amount of principal left prior to the interest .

if you spend the dividend you have less invested then you did before payment .

we just discussed this in another thread .

http://www.early-retirement.org/for...nd-dividend-strategy-for-a-nestegg-76489.html

 

[Mulligan]

90, you have me worried a bit about your "pain tolerance" anytime CDs are compared to stocks. How would you feel if GE goes from a 3.2% yield to a 6.4% yield? And no I don't mean the company raised the dividend either. . One must be fully aware of their personal tolerance for "loss aversion". As Mathjack said, they are not the same thing at all.


Sent from my iPad using Tapatalk

 

[mathjak107]

the problem is when dividends are cut or suspended . now to pay the same bills you have to sell shares that are down big time to make up income shortfalls .

that is why we use interest bearing instruments , dividend stocks and growth stocks to make up a portfolio ..

 

[MichaelB]

Nothing wrong with buying dividend stocks, but no, div stocks are absolutely not a replacement for bonds/CDS.

Saying "I can buy AT&T for the yield and forget about the price" completely ignores the non-zero possibility that AT&T can cut it's dividend and also that both its price and its dividend can go to zero.

So buy stocks if you want stocks, but the way you've framed the question sounds an awful lot like incurring additional risk to reach for yield. That's a classic investment mistake that has led plenty of portfolios to ruin.

+1

Most people need some "safe" money in their portfolios. Despite the low yield, CDs and fixed income fill that role, dividend paying stocks so not.

dividends are a return of principal when paid .

Dividends are not a return of principal. They are a distribution from the business operations.

 

[Sunset]

Nothing wrong with buying dividend stocks, but no, div stocks are absolutely not a replacement for bonds/CDS.

Saying "I can buy AT&T for the yield and forget about the price" completely ignores the non-zero possibility that AT&T can cut it's dividend and also that both its price and its dividend can go to zero. .....

All true.
Of course bonds can go to zero as well when a company goes bankrupt, which is the common reason the stocks go to zero.

 

[samclem]

Dividends are not a return of principal. They are a distribution from the business operations.

Just to be clear: Sometimes dividends are paid for by selling assets or even borrowing. Sometimes unprofitable businesses pay them. I guess they are "distributions form business operations" if we count "liquidation of assets" as "business operations".
When a corporation does sell off parts of itself just to pay dividends, it does feel a lot like a return of principal.

 

[pb4uski]

Nothing wrong with buying dividend stocks, but no, div stocks are absolutely not a replacement for bonds/CDS......

+1 Vanguard Dividend Appreciation Index Fund Admiral (VDIAX) is a highly regarded large cap dividend yield portfolio but $10k invested a year ago is only worth $9,300 today and that $9,300 includes over $200 of dividends reinvested. Meanwhile, your tortoise CD would be worth $10,150 (less any early redemption penalty).

Good yielding stocks and CDs are totally different animals.

 

[mathjak107]

+1

Most people need some "safe" money in their portfolios. Despite the low yield, CDs and fixed income fill that role, dividend paying stocks so not.

Dividends are not a return of principal. They are a distribution from the business operations.

it is a distribution off your share price is what it amounts to .

even non profitable company's pay dividends and have done so right in to the grave . your invested dollars are less then you had the night before

 

[Gone4Good]

All true.
Of course bonds can go to zero as well when a company goes bankrupt, which is the common reason the stocks go to zero.

True, corporates can, but the OP was talking about CDs which shouldn't unless FDIC goes belly up. If that happens, holding stocks won't help.

Also, even corporates in bankruptcy don't normally go to zero. They can, but they don't usually. And even if the company I hold bonds in is on a glide-path to the great beyond, there are plenty of bondholders who may get paid out at 100 cents on the dollar as their bonds mature and the company struggles to stay solvent. If you own the stock, though, you're pretty much hoping for pennies on the $ at that point.

 

[Chuckanut]

A few more weeks like the last three, and all stocks, including dividend stocks, should have a higher long term return expectation. Note the use of the word 'long' in the last sentence.

That said, I agree that stocks are not the same as CD's and one should buy stocks to invest in the stock market, not because CD rates are low.

 

[target2019]

http://www.dripinvesting.org/Tools/Tools.asp

Consider the candidates, first. There are definitely enough contenders who have not cut the div in many years, and some are on sale right now.