The Age-Old Question: CDs or Dividend Stocks

Over the weekend, I was talking with a family friend who was moving some money around. I asked what he planned to do with the cash left over. I was hoping his answer wasn’t put it in a low interest savings account or stuff it under the mattress.

The conversation quickly became a discussion on the differences between CDs and dividend investing.

This is the age-old question when it comes to unlocking yield from your cash on hand. And the answer comes down to time and your risk tolerance. But, first let’s take it back to the basics.

CDs, or certificates of deposit, are essentially a savings account that locks away your money for a fixed period of time in exchange for a higher interest rate than a traditional savings account.

Here in Baltimore, many of the local banks are offering 3.5% for 9- or 12-month CDs versus just 0.25% on a traditional savings account. Both types of accounts are FDIC insured so your principal and interest is protected. Your risk is essentially zero.

Dividend stocks are going to be at the mercy of both market and management forces—but the payoff could be greater.

Yield Plus Potential Capital Gains

We talk about the yield of a dividend stock because it allows us to compare it to other options. However, dividends are declared in an amount the shareholder will receive per share.

When you decide to put your principal in a dividend stock, you’re buying a set number of shares at the current market price. The dividend amount deposited into your account monthly or quarterly is determined by the number of shares. The yield, or horsepower, of your principal is calculated by dividing the dividends you collect by the principle you originally invested then annualized.

The first reason why I prefer dividend stocks is that I can beat the yield of a CD. My loyal readers know that 3.5% is the absolute lowest annual yield I will accept from my dividend investments.

The second reason is that the value of your shares will move with the market. Shares can rise or fall because something changes fundamentally with the company, or just because investors are feeling fearful or greedy. Shares do not always move in your favor; however, high-quality companies do see their shares go up over time.

You have the potential to collect your income and grow the value of your principal over time. A CD doesn’t offer that opportunity. If you need to know the value of your money at a certain date, a CD is the logical option.

It all comes down to your individual timeframe and risk tolerance.

Dividend Stocks for a Beginner

I’ve met a lot of smart people that need me to break it down like this. They have been at the top of their fields for years and letting their money grow in retirement accounts. But then the day comes when living off your income and protecting your capital is the main focus.

I recommend starting with two types of dividend stocks—one Core Portfolio stock and one Opportunity Portfolio stock. Doing so gives you a quick taste of the range of dividend stocks out there.

Core Portfolio stocks are generally super boring. Their yield is usually a little lower, and their share prices might not move as much. Right now, one of my favorites is Public Storage Preferred Shares Series F 5.15% (PSA-F). PSA is a giant in the self-storage industry that seems to thrive no matter what is going on in the economy. People always seem to have too much stuff.

The 5.15% yield is based on the $25 par or face value of the shares. Right now, shares are trading at just $19.64, a nice discount to that face value and boosts the current yield to 6.6%. You can probably collect that until PSA decides to buy these shares back many years from now for that full $25. But you can also always sell them on the market if you need your principal.

Opportunity Portfolio stocks tend to be a little more exciting. For these, I expect both above average yields and share price gains within a few years. My current favorite is Pfizer (PFE) which yields 7.1%. double that of a CD.

The company has upcoming patent cliffs for its pneumonia vaccine Prevnar and blood thinner Eliquis. And its revenues from the COVID vaccine have been gradually tapering off every year. Markets always price in skepticism in anticipation of these events.

However, the important part is the company is working to fill in those gaps and return to growth. I expect to see substantial share price gains in the next 12–18 months.

One final thought: At the end of the day, you shouldn’t be losing sleep over your money. If you decide that investing in the market is too stressful, the right move might be a CD ladder or Treasuries. But I think once you understand the opportunities in dividend investing you might just be hooked.

For more income, now and in the future,

Kelly Green