The yields on bonds are doing something again: instead of negative interest, there is now a good three percent annual yield for federal securities that are considered safe over two years and even almost five percent for US government bonds with a similar term.
Nevertheless, it can make sense for investors to focus more on shares and their dividends. Because these company shares also offer current income, at least if the companies pay dividends.
And stocks offer investors even more: In contrast to interest-bearing securities, they also protect against inflation. Such a protective function has recently regained importance, even if currency devaluation in Germany and the euro zone has passed its peak of around ten percent at times. Inflation will remain noticeable for a while.
Shares and dividends even offer investors double protection: Unlike bonds, the value of a company share does not automatically shrink with currency depreciation. As companies weather the economy and grow their profits, many companies will also increase their dividends.
According to estimates by the British wealth manager Janus Henderson, companies will increase their distributions worldwide to a whopping USD 1.6 trillion even in this difficult year of the crisis – and thus pay out their shareholders more than ever before.
However, this dual benefit may wane if inflation stays high for too long. An evaluation based on long-term data from the US capital market cites long-term inflation of around four percent and bond interest rates rising to more than six percent as the stress threshold. Above that, corporate profits and thus the economy are likely to suffer from the high interest rates.
So far, however, it looks as if the currency devaluation will gradually decrease again. Then robust companies can continue to make decent profits and pay dividends.
More: Why companies are buying back more shares than ever before