I'm unworthy! But if one were seeking just some sort of payment, wouldn't stocks with dividends ( even though not guaranteed) be almost as good just not as diversified?
It is hard for me to answer your question, because I do not know your (1) financial objectives (2) investment horizon (3) time horizon; So that given, I will just answer it objectively, Well, dividends provide a source of income for the equity investor in that s/he does not have to sell the stock in order to realize a gain. The investor will be able to realize some sort of gain thru the dividend. When you sell your stock for a gain, you get a capitalized gain which is taxed at short term cap gains tax or long term cap gains tax. However, most dividend yields are less than 6%, and the size of the dividend (amount of payment) is determined by the amount of shares you hold. Now, you can either take the dividend as a capital gain and get taxed or reinvest it and avoid taxes. ---I feel in this year's market the trend will be for large cap stocks with dividends... On the other hand, bonds provide a payment in the form of coupon payments semiannually too. Investment in bonds is especially good if you invest in a tax exempt bond. So you will get a return of 4.5% that is exempt from taxes - yah! Although, this is a general answer, I hoped that I helped you out a bit. If I had your whole portfolio in front of me or knowing what you are trying to achieve as a whole, I could provide a better answer.
Thanks for the advice. Just was wondering in general. I've had tax free bond funds and the return always seemed pretty low to me compared to owning something like Philip Morris or GE, but never had the balls to buy individual bonds.
The return is low because the tax factor is already calculated into the return. The return is ~ 4.5% instead of the 9% that a corporate bond would give you. Also, if you buy a govt secured bond, then you know it wont default. Remember more risk is more return. So equities (large cap) have always outperformed govt bonds in the long run. Hence, govt bonds are less risk, so less return. As far as corporate bonds (ie junk bonds) which have below grade investment grade ratings are high risk thus provide high returns (sometimes in the +15%)..I worked on these structured finance bonds which were in part jr subordinated bonds that coupons were determined by a residual cashflow from a larger bond (hard to explain..a derivate instrument so to say). Anyhow, we had investors with this jr sub earning 40% one year..imagine that a 40% return one year..great ..but next 2 years they only got 11%...so more risk more return once again...
Benchmoochie, Thanks, again. No Worries, Isn't buying bonds also a gamble that interest rates will not rise in the near term future? I would assume that interest rates will stay the same until at after the election. Then all bets are off.
Change in interest rates does affect the price of the bond, but this is a nonissue if say you bought a 10 year bond and held to maturity (which is my plan btw). You are right that dividend paying stocks will less of a bumpy ride than non-dividend paying stocks. Unfortunately there are very few stocks that pay meaningful dividends. It will be interesting to see if the new dividend tax rules will reverse this trend. Another generalization about dividend paying stocks is that they tend to come from large cap value stocks (i.e. non-growth stocks). This type of stock tend to have lower PEs and tend to be less volatile (trail the market in up and down swings). I suspect over the long turn dividend paying stocks will underperform the total return of the SP500, with less volatility.
Have you guys considered Z'x or zero coupon bonds. They pay no coupon, but they are sold at a deep discount, so that upon maturity you receive a huge gain on the principal you loaned out. By deep discount I mean 40% under par or even 60%. The only disadvantage is that IRS requires you to report the yearly accretion amount (amount appreciated for the year) on your tax return.
have you checked out any REITs or oil and gas trusts? i was watching NLY when i was mainly into investing it has rebounded nicely and is still paying a 9+% div. i'm sure BM knows a lot more about REITs than i do, but i know they pay solid dividends and that they were booming, at least NLY was, when the market tanked.
