Dividends4Life: Why Dividend Stocks Aren't A Deal

Why Dividend Stocks Aren't A Deal

Posted by D4L | Tuesday, April 24, 2012 | | 0 comments »

Many investors have flocked to dividend stocks to boost their investment income. With yields on bonds, bank CDs, and other fixed-income investments near historical lows, dividend stocks look quite attractive by comparison. In fact, the dividend yields on many blue-chip stocks now greatly exceed the rates they pay on their corporate bonds. But what may surprise you is that although bond yields have generally been higher than stock dividend yields for decades, the reverse was true throughout much of the 20th century -- and there's reason to believe it might hold true again for a while

When Fool contributor Russ Krull looked at the dividend-yield phenomenon this week, he noted that low bond rates make it cheap for companies to get debt financing. Companies can also use cheap financing to improve their cash flows by turning around and using newly issued debt to buy back their shares. The money they save on dividends more than makes up for the interest they pay on the bonds. That makes investing in those stocks sound like a no-brainer. But to come to that conclusion, you have to assume not only that the total returns on those stocks will be higher than what the corresponding bonds return, but also that investors will receive an appropriate risk premium for their trouble.

Source: MSNBC

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