Yields on fixed income instruments have been in a decline over the past 30 years. While yields on long term obligations were in the mid to high teens in the early 1980’s due to higher inflation, they have come down quite a bit in the early 2010’s to some of the lowest levels in US history. As a result certain cash deposits such as Certificates of Deposits or Treasury Bills yield less than half a percent. Investors putting cash in any short-term fixed income instruments are not earning an adequate return on their investment and are also losing purchasing power of their savings because of inflation. As a result many savers have started taking on additional risk and getting into dividend paying stocks.
Investing in companies that pay dividends could be rewarding, since it could lead to a rising stream of dividend income, which bonds cannot provide. In addition to that, a portfolio of carefully chosen dividend companies might provide an inflation hedge, as companies pass on rising prices to consumers, which leads to increases in profits and dividends.
The main disadvantage behind investing in dividend stocks however is that your investment is not guaranteed by the FDIC, and could lose some or all of its value. In addition to that, unlike most bonds, dividends are not guaranteed and can be cut. Savers could still earn an adequate amount of interest by purchasing long-term bonds, but even if inflation is modest over the next few decades, it could leads to much lower real returns.
Investors who want to generate a rising stream of income that protects their principal and income from inflation should consider carefully selected dividend stocks.....