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CDs vs. Bonds vs. Dividend Stocks

Updated on May 29, 2013

CDs

Most people looking for safe, and low risk investments, put their money in CDs (Certificate of Deposit). The problem with CDs is that due to their low risk, they also give investors very low interest, which almost always are lower then inflation. What this means is that money invested in them actually are loosing value, so in effect, they have negative interest. This means that CD investors pay the bank and not the bank to the CD investor, so to speak. 

Bonds

Bonds pay higher interests then CDs do. However, bonds are relatively longer term investments, with the shortest maturities being one year after they are issued. Bonds perform better compared to CDs in that usually their interest rates are around inflation, and even pay a little premium above the inflation rate, so your money is growing even in real value terms. 

Dividend Shares

Advantages

Of the three investment tools, on the long run, dividend stocks are the best investment. Dividend shares are simply shares that pay out part of their profit to the shareholders, mostly because they have a strong cash flow, and little investment opportunities, as well as low maintenance costs. A prime example for such shares, are the shares of utility companies. There are two major reasons for this; higher dividends, and capital gain.

  • Dividends of stocks are in effect interest paid. Although officially they are set in absolute terms (dividend payout per share), when the total money invested into the shares (purchase price*number of shares purchased) is divided from the total dividends to be received (dividend payout per share*number of shares purchased) the share holder gets a percentage income on his initial investment (called the principal). This tends to be higher then the previous to, CDs and bonds. They are not much higher then bonds in normal market conditions.
  • Capital gain is simply the fancy word for profit from selling the stock at a higher price than it was purchased at.

Disadvantages

There are other advantages to dividend shares, however they are rather unpredictable. Such advantages include higher dividends when the company is doing better and lower taxes.

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