Looking for Income? What's Best - Stocks or Bonds?

If you are looking for regular income, should you own dividend-paying stocks or bonds? Both have their unique risks and rewards so understand the pros and cons of each investment before you buy.

Dividend-Paying Stocks

The positives for dividend-paying stocks include:

High yields
Increasing dividends
Price appreciation of the stock

Because stocks do not have a maturity date like bonds, dividend increases may occur year after year. And some stocks have multi-year price upsides so an investor can make large amounts of money on price appreciation.

The negatives include:

Decrease of the dividend
Elimination of the dividend
Decrease in the stock price

Dividends of poorly managed companies are often cut or eliminated. And the stock prices can fall significantly and even go to zero with or without dividend cuts.

Equity-income mutual funds pay monthly income but high fees will reduce your take. And funds tend to have lower dividend yields than individual stocks.

Bonds

The positives for bonds include:

Known income for the life of the bond
Return of principal if you hold the bond until maturity
Price of bond increases if interest rates fall
Purchasing power protection with inflation-adjusted bonds

The negatives for bonds include:

Relative low yields for safe bonds
Risky high-yield bonds can default and not pay interest and principal
Price of bond decreases if interest rates rise
Bonds have limited price upside compared with stocks

Bond funds are also sensitive to changes in interest rates and unlike individual bonds, bonds funds do not have a maturity date so you are not guaranteed that your initial investment will be returned.