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Unformatted text preview: d had declined to 2.5%. Chastened by his losses, Sam sold his
stocks and put his money back into bonds. And he never listened to Joe again.
Moral of the story: High dividends do not a bond make.
If you are an investor who abhors risk, you probably prefer to invest your money in
treasury bonds or safe corporate bonds, rather than stocks, because bonds offer a
guaranteed income stream in the form of coupons. The trade off is that bonds have limited
potential for price appreciation. A bond’s price may increase, as interest rates go down, but
most of the money you make on your investment must come from the coupons you receive
over the bond’s life. Notwithstanding your aversion to risk, you may sometimes be induced 14
to invest in stocks by what seems like an unbeatable combination – a stock that delivers
dividends that are comparable to the coupons on bonds with the possibility of price
appreciation. In this chapter, you will consider why some stocks pay high dividends,
whether such dividends can be compared the coupons paid on bonds and the dangers that
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- Spring '11