Investors unhappy with the current low-yield environment have taken a larger position in dividend yielding stocks and exchange traded funds, even at the expense of their fixed-income holdings.
While stocks may provide more attractive yields, investors could be overexposed to risky assets. In other words, conservative investors substituting dividend ETFs for bonds may end up taking on more risk than they should.
Joe Davis, Vanguard’s chief economist, in a Morningstar article emphasized that “dividend-paying stocks are not bonds.”
If investors are knowingly leaning toward dividend stocks, they will have a more equity-based investment portfolio and should be wary of greater short-term volatility or periods of risk aversion, especially in the months surrounding the fiscal cliff. [Dividend ETFs and the Fiscal Cliff]
It’s a simple point — stocks are historically more volatile than bonds. However, it’s worth keeping in mind amid the mad scramble for yield.
Vanguard’s Davis says stocks should outperform bonds over the long run, and valuations would suggest that that’s a reasonable assertion.