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Which Is Better: Bonds or Dividends?

A theme I’ve begun to see as a recession looms closer are articles touting the beauty of dividend stocks. With quality stocks offering cheap prices, that leave dividend yields growing higher and higher, with even banking stocks offering +5% yields.

Meanwhile, bonds seem to have become old news. After all, right now stocks certainly are beating out bond yields and will likely continue to do so for some time. For example, the Government of Canada’s 10-year bond yields 1.21% at the time of writing. That’s quite lower than, say, Royal Bank of Canada, which has a dividend yield right now at 4.27% as of writing.

But here’s the benefit of either situation. In Canada, there are a number of blue-chip stocks that offer investors with a long history of steady payouts from dividends. Banking institutions, utilities, pipelines, and real estate investment trusts all offer investors high dividend yields for a discount right now. And all these blue-chip institutions are great long-term investments that should continue to increase in share price for decades.

As for bonds, the main benefit is no uncertainty. While stock prices can go up and down, and you won’t necessarily know what the dividend yield will be from day to day, but with bonds, the yield remains quite stable. That means you can practically guarantee your portfolio will have returns in the mid-single-digit range and can plan accordingly for even the next 10 years.

What should investors do? Try out both! And honestly, now is the time.

Diversification is the key to any portfolio, and it can’t be argued that a great long-term portfolio could include blue-chip dividend stocks coupled with bonds. That way you can look for the long-term growth that could come with those blue-chip companies, while also taking advantage of bonds when the markets go down.

The main thing you have to remember: stick with it. A lot of investors tend to get scared when the markets go down, not only missing the opportunity to buy stocks on the cheap, but even selling their shares in a panic. This is a terrible idea, and as hard as it is, investors need to buckle down and just look away from the markets until there is some recovery.

If you’re looking to diversify and keep risk to a minimum, a great option right now is BMO Canadian Dividend ETF (TSX:ZDV). The stock offers an inexpensive way to get in on some great dividends, with a current yield of 4.93% and a year-to-date return of almost 12% as of writing. This allows investors to take advantage of some great dividend stocks without having to pick and choose for themselves. While it will likely still go down with the markets, it also likely won’t have the wild swings that you’d see with other stocks.

If you couple ZDV with a 10-year Government of Canada bond with its 1.21% yield, you’ve set yourself up for a strong and steady increase in funds. Now, if you’re looking for something with stronger returns, it’s going to be through stocks. And again, right now is a great time to pick some up. So, really, the choice is up to you, but you can’t go wrong with a mixture of both bonds and dividend yields ahead of a recession.

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Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned.

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