Investors can make an income off of their investment by investing into bonds and by investing into stocks. So if you want to start investing for an income which strategy is the best?
Before we get into the pros and cons of investing this article will look at what they actually are. When you buy a bond you are basically buying debt. Whenever a company needs to raise money they can issue a bond. Anybody can buy a portion of the bond and become an investor. By doing so they help to company raise the money quickly. Or they can buy a couple fixed income bond ETFs which are simply ETFs that hold many different bonds.
In return investors who bought the bond receive a monthly interest payment made by the company. When the bond eventually becomes “due” it is bought back at face value and hopefully investors have made money through both the appreciation of the bond and the cash flow it gave off.
High dividend paying stocks work a little differently. By buying a stocks the investor buys a part of the company. They are not loaning money to the company by investing into it. Many stocks payout a share of their earnings to these investors monthly or quarterly. These payments are called dividends.
Which one of these investment methods is more powerful? Is it better to invest into dividend yielding stocks or into bonds? Well the answer may depend on your risk level.
Bonds are normally considered to be safer because the company has to pay you back and if they go bankrupt bond holders are one of the first people on the list to get paid. However they do also pay out a much smaller return.
Stocks have a higher potential return, but also come with a much greater risk. If the company goes under then any money you invested into it disappears.
All and all it works like this, bonds are great for conservative investors who are just looking to make a safe return that is better than the kind of returns you receive in C.D.s and treasury notes. But if you are looking to get higher returns for a slightly higher risk, stocks will help you out there.
