Canadians continue to experience the effects of a downturn, yet a recession could still occur in the near future. Therefore, it’s a good time to consider how to bring some fixed income into your portfolio as protection.
But when it comes to fixed income, which is better: dividend stocks or bonds? Today, we’re going to look at both options and how Canadians can use them to their advantage during a downturn.
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The case for dividend stocks
Dividend stocks can be a great option for investors if they’re looking for companies that will pay a portion of their profits to shareholders. It means you’re gaining the fixed income of companies while also achieving returns in share price.
Even during a recession, dividend stocks can produce a steady stream of income. Furthermore, these stocks tend to be less volatile, as companies need to stay more financially stable to afford dividend payments. Because of this, share prices tend to fluctuate less during economic uncertainty.
A great option then would be to consider a dividend stock like Toronto-Dominion Bank (TSX:TD). The bank is one of the largest in the country, with a diverse portfolio. This includes becoming one of the top 10 banks in the United States, offering stable dividend growth and income streams.
Shares of TD stock are up 11.4% in the last year; however, shares are down about 1% in 2023. It currently offers a dividend yield of 4.71%.
The case for bonds
Bonds typically increase in popularity during recessions as investors can pretty much sign up for guaranteed fixed income. Whether it’s through corporate or government bonds, in return for lending money, investors will receive interest payments.
These are more conservative options, as you’re gaining fixed income but not seeing returns in terms of share growth. However, this also leads to less volatility, providing protection against losses. That can be particularly important if you need that income soon, such as for retirement.
Which is it?
So, which is it? The answer is (an annoying but true) both!
It’s important to diversify your portfolio, no matter how the market is doing. However, from there, investors need to focus on their own circumstances and goals. If you’re looking to provide a steady stream of income and see higher returns, dividend stocks could be a good investment choice. But if you’re looking to keep your cash safe, bonds are a great choice.
Ultimately, both should be part of your portfolio. It comes down to how much you have invested in each. You should further diversify your portfolio outside of stocks and bonds, investing in different currencies, commodities, asset classes, and sectors.
From there, make sure to meet with your financial advisor to rebalance regularly. They can guide you based on your own financial situation. And be sure to avoid things like panic selling.
By following this advice, you’ll have protection in your portfolio, no matter what the economic situation may be.
