Inflation-fighting alternatives to I bonds

Dividend-producing stocks no sure bet
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Dividend-producing stocks from older, established companies as well as mutual funds comprised of those same stocks combine relatively stable asset prices with generous dividends.

Upside: Dividend-producing stocks can provide a steady flow of income similar to bond yields, and because of a George W. Bush-era tax break, dividends are currently taxed at the low rate of 15 percent.

Downside: Stock prices are inherently unstable, and a big slide in stocks can wipe out many years' worth of dividends in a few weeks. Also, with the federal government looking for ways to address the yawning budget deficit, it's far from a sure thing the tax rate on dividends will stay at 15 percent going forward.

If Congress elects to raise the tax rate on dividends, companies currently offering generous dividends may put those funds into other things, such as stock buybacks. Such a strategy wouldn't match the aims of an income investor, Loeper says.

Bottom line: There are just too many question marks associated with dividend stocks to make them a viable replacement for I bonds, Loeper says.




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