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:
JNJ Johnson & Johnson 2.95% 5.09% 3.70%
CVX Chevron 3.47% 4.63% 2.70%
HSE Husky Energy 1.22% 5.98% 4.10%
BNS ScotiaBank 1.08% 3.73% 3.50%
NA National Bank 3.20% 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?
You are interested in dividend investing? Check out my Free Dividend Investing eBook and don't forget to sign-up to my RSS Feeds!