As the stock market creeps toward fresh all-time highs, it’s understandable for investors to get a little nervous. After all, it seems like only yesterday the entire financial system was in danger of collapse. Surely, investors haunted by memories of bank bailouts, the collapsing housing market, and the Dow free-falling toward 6,000 points, can’t help but think twice before committing capital to this market.
Naturally, skittish investors may be tempted to plow their money into the safety of bonds. Before you do that, though, consider that bonds may not be as safe as you’d think, and that these dividend stocks may be just what you need instead.
The ‘safety’ of bonds
Investors flock to bonds because they are supposedly safer than stocks. And, since bonds hold a superior position to equities on the corporate financing ladder, bondholders are the first claimants to a company’s cash flow.
Remember, though, that there’s always a cost. In the case of bonds, the costs of contractually assured interest payments are high.
First and foremost is that fact that generally, it’s a mistake to view bonds as risk-free. Bonds have a price like any other security, which will fluctuate. Bond prices are especially vulnerable to rising interest rates, which we may be about to embark on. Since yields and prices are inversely related, bonds will sell off in times of rising interest rates.
Secondly, although interest payments take precedence to the residual claimant status of equity holders, a coupon does not increase over time. In other words, bondholders will not see their interest payments increase throughout the life of the bond—hence the phrase ‘fixed income.’
Therefore, interest from bonds loses purchasing power to inflation over time.
The solution? Dividend stocks
This is where the beauty of dividend stocks comes in. If you own shares of world-class dividend stocks such as Johnson & Johnson (NYSE:JNJ), or Exxon Mobil Corporation (NYSE:XOM), or The Coca-Cola Company (NYSE:KO), you will not only receive dividends, but likely capital appreciation as well, since these companies have historically done a fantastic job of increasing sales and profits over time.
And, even better, dividend payments tend to rise over time, and that’s especially true if you pick companies successful enough to stand the test of time, such as these three.
Johnson & Johnson (NYSE:JNJ) has diversified business segments, which include pharmaceutical drugs, medical devices, and several consumer healthcare brands that are in nearly every household in America, including Band-Aids and Listerine.
Johnson & Johnson (NYSE:JNJ) grew its sales and diluted earnings per share by 3% and 10% last year, respectively, indicative of how strong the company’s brands are. Furthermore, Johnson & Johnson (NYSE:JNJ) has a fantastic track record of returning a hefty dose of profits through to shareholders.
In April, Johnson & Johnson (NYSE:JNJ) provided investors with an 8% dividend boost. This marked the 51st consecutive year of dividend increases.
Meanwhile, Exxon Mobil Corporation (NYSE:XOM) has evolved from its humble beginnings as Standard Oil to become one of the world’s biggest companies with a market value in excess of $400 billion.
Last year, Exxon Mobil Corporation (NYSE:XOM) grew its diluted EPS by 15%, representing yet another year of strong growth from the global energy giant.