Ask a Fool: Stocks vs. Bonds -- What's the Better Choice for Income?

The short answer: both.

Matthew Frankel, CFP
Matthew Frankel, CFP
Dec 15, 2017 at 12:00PM
Investment Planning

Q: I plan to depend on my investments for income once I retire. Should I put all of my money in bonds, or are stocks the better choice for income?

There's no easy answer to this question, simply because both options have advantages and disadvantages.

With bonds, the advantages are predictable income and the fact that you'll get your principal back. Of course, most bonds aren't 100% risk-free, but if you buy a high-quality bond for $1,000 with a 4% coupon rate and a five-year maturity, you can reasonably expect to get $40 per year for five years, and then have your $1,000 returned to you.

Stocks are not nearly as predictable as bonds, in terms of income or eventual value. However, the advantage of stock investing is growth potential. Not only can stocks appreciate in value over time, but many stocks consistently raise their dividends year after year, which can give you a growing income stream. In retirement, being able to grow your money can help offset, or even outpace, the effects of inflation.

One of my favorite income stocks isĀ Procter & Gamble. It yields just over 3% and has increased its dividend for 60 years in a row. Stocks like this can provide the income you need and also grow your nest egg over time.

The bottom line is that an income-oriented portfolio should contain both stocks and bonds. As a general rule, I suggest subtracting your age from 110 to determine your ideal stock allocation percentage, with the rest of your portfolio in bonds.