What is the Best Investment Option – CD’s or Dividend Stocks?

Feb 04

What is the Best Investment Option – CD’s or Dividend Stocks?

What is the best investment option to earn passive income? A certificate of deposit or dividend stock? My wife and I have money invested in both. Here is a breakdown of the pros and cons of each and a explanation of where we are moving our money in this low interest rate environment.

Investing in a certificate of deposit (CD) offers plenty of advantages to an investor, including the following list -

FDIC Insured Investing in a FDIC insured CD will guarantee the protection of your money up to a certain limit.
Fixed Return Investors will always earn interest off their investment, although it may not be very much.
Passive Income There is no than a certificate of deposit. Once your money is invested, you can simply sit around and wait for it to expire.

There are certainly plenty of reasons why investors may want to choose a CD to invest their money. However, there are also a couple disadvantages which include -

Poor Return CD rates are horrible right now, making them unattractive to most investors. The thought of earning less than 1% on my investment makes me sick.
Locked in Term Regardless the term, investing in a CD locks your money up. Pulling your money out before the deposit account expires will cost you a penalty.

Another option for investing your money are dividend paying stocks, which can provide a steady income stream. Here are a few advantages -

High Yields Investing in dividend paying stocks can produce much higher yields compared to a CD or savings account. Even when interest rates are high, a good dividend stock can still probably return a higher rate.
Capital Gains If you own shares of stock that pay dividends, there are two ways to build wealth. Besides earning dividend income as a shareholder, investors have the potential to earn capital gains when the stock price goes up.
Liquid Investment In most cases, the money invested in the stock market is liquid. This means you can sell your shares at any time without paying a penalty.

With the good, there is always some bad. Even though dividend stocks may offer better returns than other high yield investments, there are some disadvantages to consider.

No Guaranteed Return Unlike a CD, you are not guaranteed any return on your money when investing in the stock market. In fact, you are not even guaranteed to get your initial investment back.
Highest Dividend Paying Stocks It may be tempting to chase a double digit yielding stock. There are companies that actually have double digit yields which may be a tempting option. In almost every case, these stocks are actually risky investments and should be avoided.
Commissions and Fees If you plan to buy stock, then you will probably have to pay a commission to your broker. Depending on the amount you invest, the commissions charged can make up a big percentage of your total investment.

I have always preferred to invest most of my savings into CDs because of the security they offer. However, as interest rates remain low, I have started moving money out of our CD Ladder investments and into dividend paying stocks as we work to build our dividend stock portfolio.

Many of the CDs that my wife and I opened up in the past had been earning over 3%. Now that they are beginning to expire, the rates are below 1% which is not good enough. Because of these low rates, we have started moving our money into the stock market. Our first move was this week when we transferred $1,200 from an expired CD into the market.

For more information on how we are building a low risk investment portfolio of stocks, check out my other site called BuyStocksOnlineInfo.com.

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