Understanding the trade-off between bond investing and dividend investing

For any investor who loathes risk, the investor probably prefers to invest their money in safe corporate bonds or treasury bonds, instead of stocks. One reason for this is that bonds provide a guaranteed stream of income presented as coupons. In addition, it takes time to do stock analysis because it is the only way of determining which stocks are good to invest in. However, the trade off in this case is that bonds always have limited possibilities for appreciation of price. The price of a bond may increase as the interest rates decrease.

But a good percentage of the money an investor makes on their investment has to come from coupons, which the investor receives over the life of the bond. Notwithstanding the investor’s aversion to risk, the investor may on certain occasions be made to invest in stocks through what may seem like an unstoppable combination – stocks that deliver dividends, which can be compared to coupons on treasury or corporate bonds with the potentiality of appreciation in price. It is important to understand that when an investor buys stocks or invests in dividend stocks, the investor’s future returns will come from two main sources.
The first source is dividend, which the investor expects to be paid from the stock over a period of time. The second source is the anticipated appreciation in price the investor sees in the invested stock. Generally, the dividends the investor will receive from the invested stocks will be lower compared to what the investor would have received as coupons had the investor invested using the same amount of money in bonds. This factor actually sets up a classic exchange between bonds investing and dividend investing. While the risk level in bonds is very low, there is no guarantee of price appreciation for the bond in future. With dividend, this will only appreciate based on the performance of the stock.

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