Dividend Stocks Not A Bond Substitute

Dividend-paying stocks may look attractive in a low-yield market but they are not a substitute for the safety of bonds, according to Vanguard's chief economist. There is no easy answer to what to do when money market funds, long-term Treasury bond funds and municipal bond funds are yielding miniscule interests, Vanguard chief economist Joe Davis said in his recent blog. Some would turn to dividend-paying stocks, but they don't guaranteed better returns, he said.

"Dividend-paying stocks are not bonds," Davis cautioned. "Indeed, by their name, they are stocks and thus are going to possess more of the risk-and-return attributes of stocks than bonds. Income-focused stock funds, be they dividend-paying funds or REIT funds, tend to correlate with the broader equity market." As bonds made their slow but steady climb over the last few years, dividend-paying stocks did better sometimes, but not always, and they sometimes underperformed bonds, he said.

Source: Financial Advisor

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