Interest or dividend - which is best?

dunstonh

ShinyStarlight1 said:

sevenhills said:

AlanP_2 said:

There are thousands of people that use dividends to provide an income over long periods, how is that short term?

Using dividends can be tax-effective, but that doesn't sound like the OPs reasoning. The OP needs to return and give us more info.

It was really a question I didn’t know the answer to myself. I knew there must be a reasoning why people would choose one over the other but couldn’t work out why. As I don’t currently have an income, but do have money to save/invest it felt quite an important question to understand.

The use of cash savings to provide an income actually increases the risk.   You have shortfall risk and inflation risk.  Eventually, you end up starting to eat the capital to keep up.      However, the degree of that will be linked to the actual income need.

Investments bring you investment risk but reduce shortfall risk and inflation risk.    Over the long term, for someone needing income, the overall risk with investments can actually be lower than the risk of putting it all on cash savings.

wmb194

It isn't either/or, you can earn interest and dividends (and PIDs*). The interest earning portion of your portfolio will usually be lower risk, sure and steady whiilst the dividend earning part will be higher risk but can also allow for capital gains and dividends that grow over time e.g., the Investment Trust 'dividend heroes.'

There are some hybrid securities that'll give you dividends with lower risk and volatility than ordinary shares e.g., preference shares and building society PIBs (interest). There aren't many preference shares left in London, there are more in the US, but there are still a few from household names like Aviva/General Accident, BP, Lloyds, NatWest, Santander, Standard Chartered and RSA (Royal Sun Alliance as was).

https://www.theaic.co.uk/income-finder/dividend-heroes


https://moneyweek.com/investments/stocks-and-shares/share-tips/605082/the-highest-yielding-pibs-and-preference-shares

The can also be some tax optimisation opportunities by using the zero tax allowances/rates for interest and dividends.

*Property Income Distributions, paid by real estate investment trusts (REITs).

ShinyStarlight1

I appreciate everyone’s comments here, thank you for your insights.

jimjames

ShinyStarlight1 said:

I appreciate everyone’s comments here, thank you for your insights.

You might also want to look up the Investment Trust Dividend heroes, some have paid increasing dividends for well over 50 years as well as the share price increasing in that time. If that was cash paying interest then you'd not have very much by now.