Ask Bankrate: Are dividend stocks still a good investment?

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Questions:

Q1: Are dividend stocks still a good investment tool?

Dividend stocks had been getting hammered. Do you still think they’re a good investment tool?

— Gail C.

Answered by Stephen Kates, CFP: “Dividend stocks, like all stocks, can still have significant volatility, which is normal especially in extraordinary times like we are in. The merits of an individual dividend stock should be based on its fundamental factors such as revenue growth, debt, dividend payout ratio, and dividend track record. For a quality company, a drop in price can often be viewed as a positive: great company on sale for a limited time only!

Some of the most stable and strongest dividend stocks are referred to as Dividend Aristocrats, meaning they have consistently raised their dividends for 25+ years. Companies like these have weathered multiple recessions and business struggles. Quality dividend companies are rarely as flashy as the high-profile growth companies that have taken over the headlines, but they are still worthy investments for people who are looking for income-producing investments.

I suggest you consider your goals for this investment and the type of account you will be holding this investment in. If you are planning to use this investment for a current income, then a portfolio of strong dividend stocks can create a stable stream of income. If you are not planning to use this money for income soon, then you should focus less on dividend stocks specifically and instead focus on finding stocks with the best total return, whether that is from price appreciation, dividends or both. Also worth considering is the tax status of your account. If this is a taxable account, you might be paying income taxes on your dividend income and this may raise your tax liability if you aren’t planning to use the dividends for current income.”

Q2: Do CDs beat bonds over the next five years?

Lower interest rates have caused bond yields to drop. Would CDs be a better choice for the next five years or longer?

— Jennifer

Answered by Greg McBride, CFA, Bankrate chief financial analyst: “Bond yields have dropped, but unfortunately, so too have CD yields, as well as the returns for other safe-haven savings and investment products. The top-yielding, federally insured CDs do offer yields that beat what you’ll get in government bonds and maybe high-grade corporate bonds too — and without the risk of default.

While bonds are subject to interest rate risk — the risk that bond prices fall with a rise in interest rates — the early withdrawal penalties on CDs are minimal by comparison, and spelled out in advance so you’re not subject to the whims of the market if cashing out prior to maturity. A CD early withdrawal penalty involves forfeiting some, or all, of the interest earned depending on the maturity of the CD and when you withdraw. So while CDs are a better choice than bonds, with interest rates at record lows that’s a little like saying that getting your foot stomped on is better than getting kicked in the shin. Neither one is very fun.

And with interest rates at record lows, locking into longer maturity CDs doesn’t offer much in the way of return, even over a period of five years. In fact, the yields on five-year CDs aren’t much higher than one-year CDs, so there is little incentive to commit your money for that long at such a low rate of return.”

Q3: Housing prices keep going up. When will they go down?

At least where I live, housing prices have gone up instead of down. Is there typically a delayed reaction in housing prices? I keep waiting for the housing market to adjust, but it’s adjusting up, not down.

— Susan H.

Answered by Greg McBride, CFA, Bankrate chief financial analyst: “Home prices in your area may still continue to go up if the demand among homebuyers exceeds the supply of homes available for sale. That dynamic has been in play for the past few years, fueling higher home prices in many markets, and is even worse in the pandemic environment.”

Q4: Will I lose what I’ve paid in interest if I refinance?

What happens if you have paid mortgage for five years out of 20 and then refinance to 20 again. Don’t you lose what you already paid in interest?

— Mary K.

Answered by Greg McBride, CFA, Bankrate chief financial analyst: “What you’ve already paid in interest is what’s known as a sunk cost — it’s over, it’s done and there’s nothing you can do about it. Refinancing at a lower rate will reduce the interest you pay going forward, particularly if you stay on the same repayment schedule.

If you have 15 years remaining on your current loan and refinance into a 20-year loan, this will generate significant monthly savings, but you’ll be making payments for five years longer than you originally would. This may well still save you money, but not as much as if you’d either a) refinanced into a 15-year loan in order to stay on the same repayment schedule, or b) refinanced into a 20-year term but made extra payments in order to get it paid off in 15 years.

It’s a great time to refinance and in doing so, would recommend you weigh the desire to have the home paid off 15 years from now (per your original loan’s timetable) against your ability to comfortably make mortgage payments while still contributing to your retirement accounts and having wiggle room in your budget.”

Q5: Already delayed building a home. Should we keep pushing it off?

We were building a home starting this October but have pushed the start date back to February. Should we still move forward with this or continue to hold off? We have excellent credit, but we’re curious how challenging it will be to get a construction loan if banks are holding back.

— Erin S.

Answered by Greg McBride, CFA, Bankrate chief financial analyst: “That’s a tough call, as much of this will depend on the overall economic environment. Hopefully a few extra months will allow more time to put the virus and all of its economic constraints behind us. Your odds are better if the virus is in the rear-view mirror and the economy is clearly recovering, rather than an environment where the virus is ongoing, economic activity is restricted and unemployment is still very high. But in either event, as long as your financial state is solid (excellent credit, proof of income and sufficient savings), financing will be available somewhere.”