Dividend Stocks Aren't the New Bonds

For many investors who crave steady income, bonds don't look as good as they used to. With U.S. Treasury yields languishing near historic lows, some people believe they've found a great alternative: dividend-paying stocks or dividend-focused mutual funds. Many investment pros say it can be a reasonable move for at least part of an income-oriented portfolio. But they caution that investors need to understand the risks.

The most basic concern: Equities don't behave the way bonds do, and investors face a much greater chance of capital losses with stocks and stock funds. "People may not appreciate that moving from bonds to stocks is a major change in asset allocation," says Joseph Davis, chief economist and principal at Vanguard Group. Investors should also remember that dividend-paying stocks don't always behave like other stocks, either. Dividend payers are often larger, established companies—which means they often aren't perceived to have the same potential for earnings and revenue growth as smaller firms.

Source: Wall Street Journal

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