Cash Paying Securities: Stocks Versus Bonds

In addition to seeking healthy returns on money, investors also judge where the want to put their funds by what sort of cash flows they can get out of the investment. Sure, commodities such as gold and platinum, and many stocks and bonds offer excellent return potential, but if they offer no cash from month to month, the investor’s cash flow is tied up entirely in the security itself. To get around this, there are several investments that an investor may make use of to maintain some current income and cash flows. These investments include dividend paying stocks/ETFs, and Bonds. I will discuss each separately, and the pluses and minuses of both.

Stocks

Stocks are great in terms of growth potential, and have historically outperformed bonds in terms of growth. Stocks that pay a dividend in the simple sense are a lot like bonds; you put your money into the shares, and you get a payment every month or quarter. Sounds simple? However, there are pitfalls you need to be aware of. The first is to see if the dividend has been stable or steadily increasing over the LONG term, preferably 10 years minimum. You don’t want to buy the security expecting $1 per share and have it slashed to $.50, $.25 or even nothing. There is nothing that forces companies to keep paying their dividends. In addition, your principal (original amount you put in) could drop as well). A good alternative is to look at shares of preferred stock; they tend to have a larger dividend, and the dividends on preferred shares must be paid first before other dividends are paid out. Another good way to diversify your risk is to invest in an ETF (exchange traded fund), which pools together shares from hundreds or thousands of companies, helping to minimize your risk if one stock alone cuts or delays its dividend. Some funds which I invest in personally are AGC, AVK, and AOD (Advent Claymore and Alpine), but there are many other out there as well. Another good option is a REIT or Royalty trust which pays dividends that are typically larger and avoids the double taxation of dividends. The only downside to this is that their dividends are taxed at ordinary income rates, so beware of this for tax purposes.

Bonds

Bonds are best for those who are more risk adverse or getting closer to retirement age. Your principal is safe, unless you choose to sell your bond in the open market. Remember that bond returns and prices are inverse; bond rates are currently low, making their prices high. If you buy a bond now, be prepared to hold it until maturity or you may lose some on your initial investment. The best thing about a bond is that your payments are guaranteed; if the company doesn’t make their payments, they can be held in default and forced into bankruptcy. In addition, if the company does go bankrupt, you have a good chance at getting some of your principal bank, versus none for shareholders (bondholders have priority over stockholders). Bond risk is easy to determine; if they are in the A-AAA, and not in a currently depressed market (i.e. A-AAA bonds involving real estate), it is probably safe to buy them, with a low risk of default. Bonds may not offer mega returns, but if your aim is cash stability and security, bonds may be the best route to go.