Question
I wanted to create some additional income and my stockbroker advised me that good quality high yielding shares would be better than corporate bonds because of the effect of inflation. Would you agree with this?Answer
If we consider income in isolation then your stockbroker is generally right. Income from corporate bonds is fixed, whereas dividends tend to rise over time, making them a potentially better hedge against rising inflation.
However, it's not that simple as the (capital) value of both corporate bonds and shares can vary.
The price of corporate bonds tends to fall if inflation and/or interest rates rise (as it makes a fixed income them less attractive) and vice-versa. Shares can fluctuate quite markedly in price depending on the prospects of the companies concerned and general stock market sentiment.
So while income from shares might be the better long term hedge against inflation, this may be little consolation if stock markets dive shorter term and lose you money overall. Of course, stock markets might also rise, no-one knows, the main thing is to be comfortable with the potential volatility.
So I'd be inclined to favour decent dividend shares over 5-10+ years, but shorter term I fear high volatility might make the shares route rather risky.
I wanted to create some additional income and my stockbroker advised me that good quality high yielding shares would be better than corporate bonds because of the effect of inflation. Would you agree with this?Answer
If we consider income in isolation then your stockbroker is generally right. Income from corporate bonds is fixed, whereas dividends tend to rise over time, making them a potentially better hedge against rising inflation.
However, it's not that simple as the (capital) value of both corporate bonds and shares can vary.
The price of corporate bonds tends to fall if inflation and/or interest rates rise (as it makes a fixed income them less attractive) and vice-versa. Shares can fluctuate quite markedly in price depending on the prospects of the companies concerned and general stock market sentiment.
So while income from shares might be the better long term hedge against inflation, this may be little consolation if stock markets dive shorter term and lose you money overall. Of course, stock markets might also rise, no-one knows, the main thing is to be comfortable with the potential volatility.
So I'd be inclined to favour decent dividend shares over 5-10+ years, but shorter term I fear high volatility might make the shares route rather risky.
Read this Q and A at http://www.candidmoney.com/questions/question421.aspx
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