Don't trust dividend stocks in a crazy market

With interest-bearing accounts paying practically nothing and bonds paying little more, many income-oriented investors are turning to dividend-paying stocks. But a fresh look at the numbers shows investors tread this path at their peril. "More than $18 billion has poured into the Lipper Equity Income category . . . through September 2011, the largest amount of cash flow of any Lipper equity fund category year to date," the Vanguard Group reported earlier this week. "This seems to suggest investors may be looking beyond bonds in search of income."

While there are many good investments in this category, Vanguard chief economist Joe Davis warns that high risks make dividends an overly risky substitute for investments that pay interest. In the term "dividend-paying stocks," the key word is "stocks." Any money switched into dividend-oriented stocks or mutual funds should come from other stocks, not from the fixed-income portion of one’s portfolio -- unless you really intend to take more risk.

Source: MSN Money

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