Income Investing: Bonds vs. Stocks
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One of the more heated debates that goes on in the world of income investing is whether stocks should be favored, or whether bonds should be the investment of choice. As always, what you do depends on your personal situation, and what you are comfortable with. A financial professional can also help you chart your course. But it does help to take a look at some of the basics of bonds and stocks when trying to make your decision.
Bonds
Bonds are considered safer than stocks. They are normally fairly reliable, especially U.S. government bonds. Even some corporate and municipal bonds are reasonably reliable (while offering higher returns than Treasuries). Unfortunately, bond returns are relatively low, to go along with this lower risk. In many cases, your income from bonds is eroded by inflation. On top of that, right now bond interest is taxed at your income rate — which means that between taxes and inflation your income could be very low indeed. Investing in TIPS can actually help you combat the effects of inflation, though.
Stocks
The Motley Fool points out that over time, stocks outperform bonds in most cases:
Over long periods, stocks have outperformed bonds. Period. They have done so more than 95% of the time in the 20-year periods between 1871 and 2006.
Another valid point is the fact that there are dividend-paying stocks that provide even more income on top of returns from stock increases. Dividends are also taxed at a lower rate, capping out at 15%. (Buy and hold investors can also enjoy the the tax efficiency of long term capital gains.) And if you use DRIPs, you can reinvest your dividends free of charge — it’s like using free money to buy more shares. You can adjust this down the road as you need the income.
In the end, some diversity in your holdings is a good thing. But don’t be so concerned about the stock market that you overweight your investment portfolio with bonds and neglect the advantages that can come your way through stocks.
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.



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