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A Better Way to Look at Investing in Equities for Income

The pros and cons of using dividend-paying stocks as bond replacements.

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It's tempting for investors striving to live off their portfolios in the current interest-rate environment to consider dividend-paying stocks as bond replacements. While equities have historically been 4 to 5 times more volatile and lack the protection afforded fixed-income securities in the capital structure, their yields offer an enticing alternative.

Stock yields are lower now than at the end of the financial crisis, but they're better than 10-Year Treasuries and competitive with corporate bonds. In fact, the relative advantage of the S&P 500 hit a more than 20-year high in July, when its 1.96% projected one-year yield was about 3.6 times the 10-Year Treasury's 0.55% yield and edged the Bloomberg Barclays U.S. Corporate Bond Index's 1.91%.

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Alec Lucas does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.