Dividend Stocks Vs Corporate Bonds

We currently live in a very interesting investing world. I say this because, in some cases, the dividend paid on a stock has a higher yield than the company’s bonds. The bond market is so low due to historically low interest rates that the dividend market seems more attractive. Here are a few examples that I took from my own Dividend Holdings:

TickerCompany NameSmallest Bond Yield (short maturity date)Biggest Bond Yield (Longer Maturity Date)Current Dividend Yield
JNJJohnson & Johnson2.95%5.09%3.70%
HSEHusky Energy1.22%5.98%4.10%
NANational Bank3.20%3.20%3.50%

In order to build this chart, I used the “quicktake” tool from Morning Star. This is an interesting stock analysis tool as it gives you a lot of information on the company’s stock and also provides quality information regarding to their bonds.

Why I prefer Dividend Payouts over Bonds

In fact, there are a lot of differences between holding a company’s dividend paying share and a corporate bond. The first reason: I prefer to hold dividend stocks over corporate bonds is the tax implication. In Canada, dividends are taxed less than interest income. Therefore, a 3% dividend yield is worth an interest rate of about 3.96% in a non tax sheltered account (e.g. not held in a RRSP or a TFSA). When we take a look back at the chart, we can see easily that my Canadian stocks are advantaged compared to bonds.

Interest Rate Increase Threat

Another reason to prefer dividends over bonds is the threat that interest rates will likely rise over the next couple of years. We all know that the values of existing bonds drop when interest rates rise. Therefore, your capital gain potential in selling your corporate bonds is very limited (read close to nothing) in the upcoming years. Then, if you invest money in a corporate bond, you will be “stuck” with the interest yield until the maturity date.

Capital Gain Appreciation

Another point to consider is the capital gain potential lying in every stock. As I have mentioned in my HSE stock analysis, I am making this play because I believe that oil prices will rise and companies such as HSE and CVX will benefit from it. Therefore, I am enjoying a nice dividend payout in the meantime while I see the stock prices going higher. As I mentioned earlier, you can’t really expect any capital gains from trading corporate bonds at the moment.

In order to beat the dividend yield, you need to wait for a while

In the chart I have presented on the top of the post, I didn’t put the maturity date for the highest corporate bond yields. In fact, some of them expire in more than 10 – 15 years. Therefore, if you want to beat the dividend payout, you must hold the bonds during several years (assuming a rise in interest rates, your bond values may drop and you would sell at a loss which affects your investment yield).

Dividend increase vs Interest rate flat growth

If you select the right dividend stocks, you can expect dividend increases over the years. Some investments I made this year are in companies known for raising their dividend payout on a steady basis. Therefore, you can expect to earn a higher dividend yield than its corporate bonds if you hold the stock long enough. On the other hand, once you have purchase your corporate bond, there is nothing going on with the interest rate. Then again, you will be stuck with your interest yield.

Dividend stocks vs Corporate Bonds – Where do you stand?

I guess my position is clear: I’m ignoring corporate bonds at the moment for the profit of dividend paying stocks. Depending on the market and the economic situation, this statement can change over time. However, right now, I don’t see any reason why I would pick a corporate bond when I can have a share paying great dividends. What do you think?

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  1. says

    I think a lot of it has to do with risk tolerance. I for example hate risk and therefor prefer to have a steady stream of income just as long I beat inflation. I don’t like volatility in stock prices and knowing that there is a change that I may lose money when I sell. If i were to buy bonds I would be buying and holding to maturity.

    -Ravi Gupta

  2. craig says

    I own a gm 8.125 percent bond that matures in 2017…I own a limited 7.6 percent bond that matures in 2037…I own a dominion resources 7.83 percent bond that matures in 2027….think i’ll risk it…

  3. says

    The risk factor involving various investing schemes other than dividend shares is relatively higher. The dividend paying shares are usually given away by the stable companies which can combat recession or a financial fall and thus, the investors are at low risk and the money invested is a passive income. But, to invest in the dividend shares the research involved must be intense and not all companies offering dividends are making profits.

  4. Harry says

    I just had a 10 year ladder developed for me by a Brokerage recommended by CBID. According to instructions,the average maturity was 6 years, with 75% being A rated or better, and none rated below BBB-. The trouble is that I would have a distributable yield of below 3%. However I had this same ladder priced by another friendly broker who used 100bps as commission, and my yield became 3.74%. The moral here is theft by hidden commission. In his recent 3rd Edition “In Your Best Interest”,Hank Cunningham recommends CBID, who will now buy you as little as $5000 face value of a bond, advising that in his experience the commission should fall somewhere between 0.5 to 1.0%. I have a fear of lawsuits, so won’t mention who the Brokers were.


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