Webcast excerpt: The difference between bonds and dividend-paying stocks

Transcript

… You see this behavior that happens quite a bit when you’re in a low interest rate environment, folks are trying to get additional yield. But the thing you have to remember is that when you own a stock, whether or not it’s a real estate investment trust, a high-dividend-yielding stock or fund, it is an equity.

So when you have a downturn in the equity market, you’re going to see the principal value in those types of investments decline pretty dramatically. So, again, yes, it’s an income-producing asset; however, from a diversification standpoint, it will not hold up the way a bond will hold up in a downturn in the market. And you do want that diversification to help you reduce some of the volatility in your overall portfolio.

So it’s something that investors have to be very cognizant of. When they’re taking on that additional risk, there is a consequence associated with it, and they could see some significant principal erosion that comes along with that in a downturn.

Important information

All investing is subject to risk, including the possible loss of the money you invest.

Diversification does not ensure a profit or protect against a loss.

Investments in bonds are subject to interest rate, credit, and inflation risk. 

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