Dividends are superior to interest

A friend of mine was as happy as all get out because he just put some long term savings into a bank certificate of deposit (CD) and is getting a 4.67% rate of return for 6 months. The funds he put into the CD were long term savings money and not earmarked for any near term expense. Man he was thrilled. After yawning I asked him why he did that as opposed to buying a good, high-paying dividend stock. He had that deer in the headlights look.

Four good things can happen to you if you buy a good company that pays a healthy dividend.1) The payments are 4 times per year as opposed to every 6 months. This can help those rely on steadier cash flow. 2) Good companies have a history of raising those dividend payments becaiuse of earnings increasing.. 3) Federal taxation on dividend income is at a flat 15% as opposed to your full Federal tax rate on interest earned. 4) Good companies that pay high dividends and have a history of raising those payments typically have a higher stock value in 1, 2 or 3 years.

Compare this with a bond or CD. 1) You will receive back your initial investment, but not a penny more, 2) you will be fully taxed (except if it is a municipal bond) at the Federal and if a corporate bond or CD, your individual state level, 3) interest payments will never rise during the course of owning the bond or the CD-its fixed.

My friend wasn't so happy after we spoke, but I least bought the coffee...

Georges Yared is the author of recently released books "Baby Boomer Investing...Where do we go from here?" and "Stop Losing Money Today" For more info go to http://www.georgesyared.com