Alternatives to Dividends
Dividends are annual payments that companies pay to their shareholders from the profits made during the year. Dividends are paid out to encourage investors to buy the shares of the companies that pay them, sometimes producing attractive returns to shareholders. According to the Wall Street Journal, the Dow Jones Select Dividend Index, an index of high-yielding U.S. stocks, produced an after-tax annualized return of 3.77 percent (2010), compared to the 1.88 percent yield of the 10-year Treasury bonds and 1.68 percent of the Dow Jones Total Stock Market return.
There are a number of alternatives to dividends----or other types of payments or returns that assets other than shares produce. You may be interested in those as a way to widen your investment options, and diversify away from common stock.
Other People Are Reading
-
Rents
-
Rents are to real estate what dividends are to stocks. They are regular payments that those assets produce. House rents depend on the kind of real estate you have. In contrast to dividends, however, you are in charge of managing the property yourself, including finding the tenants and carrying out all the necessary repairs and maintenance works. However, nearly any house can produce rents, whereas many companies suffer loses and do not pay dividends for years.
According to Investopedia, high-growth companies typically pay no dividends, as all profits are reinvested in the business. Unprofitable companies also do not pay dividends. In contrast, real estate always provides a reliable source of income in the form of rental payments.
Bank Deposit Interest Rates
-
The interest rate payments that a bank deposit fetches are also similar to dividends. The difference here is that interest rate payments are typically fixed, at least in relatively short periods of time (no bank takes deposits with a fixed rate for,say, 20 years), whereas dividends payouts are unknown beforehand. Bank deposits are also often insured (the FDIC insures all deposits in the U.S. below $250,000), while you can lose all your investments if the company whose share you've got goes bust.
-
Bond Coupons
-
Coupon bonds offer another option to have an asset that yields a regular return. Like bank term deposits, bonds produce a fixed return, that can be paid either regularly (a coupon bond) or at the end of its maturity (e.g., Treasury Bonds). Coupons bear similar company default risks as shareholders, in contrast to the real estate and insured bank term deposits.
-
References
- Photo Credit detached house image by martini from Fotolia.com
