BillGunderson

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We live in a time when CD rates are around 1% on a one-year basis. A 10-year Treasury bond is yielding approximately 2.5%. The problem is that both of these numbers are below the expected inflation rate going forward. So the interest rate you are getting is not keeping up with the inflation rate, and you are actually losing money on a real return, inflation-adjusted basis.

I much prefer dividend-paying stocks to fixed-income instruments such as CDs and bonds. I have a portfolio of 25 dividend-paying stocks designed for income-oriented investors. The yield on that portfolio is around 3.1%, which is higher than the CD rate and the 10-year Treasury rate. In addition to the income component of the portfolio, investors also have a chance to participate in capital appreciation.

Now that can go both ways — the portfolio can also go down. But over the next few years, dividend-paying stocks should provide investors with better capital appreciation than fixed-income securities. The only way fixed income is going to appreciate considerably is if interest rates go down, and I do not see how rates can go much lower over the next five years. That is why I continue to prefer a portfolio of dividend-paying stocks as a fixed-income alternative.

Looking at historical returns, the Treasury bond market TLT, -0.07%  has averaged 6.8% over the last five years, whereas the WisdomTree Trust LargeCap Dividend Fund DLN, +1.09%  has averaged more than 20% over that same time period. As we look out over the future investment horizon, I think dividend-paying stocks are going to do even better over the next five years relative to the bond market than the prior five years. Declining interest rates have helped bond market returns over the last few years, but what about the next five?

Another thing to remember about owning fixed-income securities is that you own debt. As an investor, you become a lender, not an owner. You are lending money to an institution, a government, a company, a municipality or a state. When you are a lender, you are subject to interest-rate and credit risk. While credit quality has improved over the last few years, the 10-year Treasury yield has climbed from 1.2% to 2.5%, and that has not been good for debt investors.

Neither bonds nor dividend-paying stocks are riskless investments. Fixed-income investments are subject to interest-rate and credit risk. Dividend-paying stocks are subject to market risk. That is why I believe in an actively managed portfolio of stocks in order to help manage that risk.

One name in my income portfolio of dividend-paying stocks is Wells Fargo WFC, +3.52%

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