Why Shares Outperform Bonds as the Optimal Long-Term Income Investment

Interest rates are expected to decline as inflation falls below the Bank of England’s 2% target in the coming years. This forecast indicates that share prices will be more positively affected than bond prices. Additionally, an accommodative monetary policy leading to an improving economic outlook is likely to enhance investor sentiment and encourage the purchase of riskier assets like shares, resulting in higher share prices.

While bond yields have risen, the lower valuations in the stock market have made equities more appealing. Cheaper stock prices offer greater potential for long-term capital growth. This column believes that a larger portfolio significantly benefits investors, regardless of their investment objectives, and therefore advocates investing in dividend stocks that offer an enticing income return.

Although the current income return of the FTSE 100 index is below 4%, there are numerous equities available with significantly higher yields. Therefore, a portfolio composed of high-yielding dividend stocks can generate a more appealing income return than implied by the index yield. Moreover, many stocks have a long history of maintaining and even increasing dividends despite challenging market conditions, suggesting that equities are a reliable source of income.

While some income investors may prefer bonds, this column retains its preference for dividend shares. Despite their imperfections, dividend stocks continue to offer a greater long-term income appeal than bonds, especially when combined with the low valuations and improving economic outlook resulting from accommodative monetary policies. Consequently, shares are expected to provide a higher total return potential compared to bonds, and our future income columns will focus primarily on equities rather than fixed income assets.