I have commented before on how I like dividend paying stocks; however, I like them more for the type of company you tend to get. Others I presume may like them more for the income stream.
There is nothing wrong with that, especially in this low interest rate environment where investors are looking for yield. Investors just need to know that just because a stock pays a healthy dividend doesn’t mean it’s high quality.
Similarly, while the income from stocks might be higher than bonds currently, the volatility of dividend paying stocks is also higher. In short, if you are using bonds to help lower the volatility of your portfolio then dividend paying stocks are no substitute.
Vanguard recently wrote an article that shows while bonds yielded less than dividend paying stocks from 1998 through the end of October 2011, they also were less volatile and had a higher return.
None of this is to say that dividend paying stocks aren’t a good place to invest going forward; however, if you are using them as a bond substitute, just be prepared for a bumpier ride.
