With interest rates continuing to hover at historically low levels, investors looking for income are understandably frustrated. Perhaps it should come as no surprise, then, that more people are recommending dividend stocks as an alternative to bonds, CDs, or even savings accounts. See here for an example.
As such articles sometimes (but not always) point out, stocks are not bonds, and they’re sure as heck not CDs or savings accounts. Stocks have an entirely different risk profile and, no matter how high their yield, they’re not a reasonable replacement for fixed income investments or cash equivalents.
Think about it… If you’ve been holding cash, there’s probably a good reason for it. And that reason is almost certainly not compatible with putting your money in the stock market.
Yes, high yield stocks can be good income producers, but they can also be very volatile. Don’t believe me? Check this out…
From it’s peak in the summer of 2007 to it’s low point in the spring of 2009, the S&P Dividend ETF (SDY) plummeted from $65.89 to $27.53 — a loss of 58.2% in less than two years. As of today, it’s back up to a bit over $55, which is still more than 15% below it’s peak.
Sure, it currently yields a little over 3.1%, and yes, some dividend stocks yield more or perform better than average (though others yield less and/or perform worse). Regardless… Yikes! Does that sound like a reasonable alternative for holding your cash?
Here’s my advice… If you need (or want) to hold a cash equivalent in your portfolio, then hold your nose and do so. There is no such thing as a free lunch. If you chase higher yields, you increase your risk.
Yes, inflation is a concern, and I’m not suggesting that you shun the stock market in favor of the alternatives. But don’t go putting money that you might need in the near term in the stock market simply because your savings account is paying a pittance.