Furthermore, it bears repeating (even though it is obvious) that stocks are not bonds. Even income-oriented equities carry more risk, including a high correlation with the broader equity market.

And investors must still face these risk/reward characteristics in falling stock markets, as this past summer reminded us. Dividend-paying stocks may sometimes outperform the broader equity market (as they have over the past several years), and vice versa. But if you substitute dividend-paying stocks for bonds in order to generate greater income, the final result is a more aggressive and stock-heavy strategic asset allocation, one with more volatility. Even if equities offered greater long-term return potential, as many people believe, there is just no substitute for the volatility-dampening properties of bonds.

Figure 1 illustrates this dynamic from the end of 1997 through 2011, a period marked by both bull and bear markets. The risk-adjusted returns of bonds by themselves were compelling during this time frame, but even more compelling was the standard deviation of the asset class compared with those of all other income alternatives. The yields may be among the lowest available for now, but that won't always be the case. And meanwhile, low volatility remains a hallmark of the asset class.

This low volatility cannot be understated and is often overlooked. Indeed, proponents of investing in dividend stocks over bonds will argue that stocks with a track record of increasing dividends can provide an income stream that grows every year, even if the stocks themselves fall in value. They point to 2008, when dividends rose in spite of the turmoil by 9.9%. But dividend stock advocates fail to mention that those same stock positions lost 30% to 40% of their overall value before the market bottomed. In these environments, most investors are not appeased by dividend growth alone. In contrast, even during the most rapidly rising interest-rate environments, fixed-income losses have generally been far less gut-wrenching.

Also, it is important to bear in mind that companies, even blue chip stocks, have been known to reduce their payout, as they are not legally bound to pay dividends. In 2008, such reductions were frequent among banks and financial companies, including GE, which slashed its cash payout. Interest income on bonds, by contrast, cannot be cut arbitrarily.

Therefore, as frustrating as this low-interest-rate environment may be for fixed-income investors, dividend-paying stocks are not pure substitutes for bonds. They may outperform in future years, but the trade-off is not without risk.

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