What is the difference between stocks and bonds, and which securities will yield a higher percentage of profit?
Securities are one of the most popular and profitable investment assets, but investors always face the question of whether to choose stocks or bonds.
To make the best choice, you should know the difference between stocks and bonds, and which security is best for you.
Stocks and bonds are two popular types of securities that investors use to make a profit.
Stocks are shares in a company, with compensation in the form of dividends, while bonds are debt obligations that obligate the issuer to pay the owner a certain amount with interest over a period of time.
It should be noted that these two instruments differ not only in the mechanism for generating profit, but also in the level of risk.
The main differences between stocks and bonds
The easiest way to understand the main differences between these two types of securities is to use a comparison table:
| Criterion | Stock | Bonds |
|---|---|---|
| Right to manage a company | Yes (through voting at shareholders' meetings) | No |
| Guaranteed income | No (income depends on the company's profit) | Yes (with coupon) |
| Market value growth | Yes (can grow significantly) | Limited (redemption at par) |
| Taxation | Dividend taxes are usually higher | Tax on interest income is usually lower |
| Risk of loss of capital | High (depending on the market) | Below average (especially for government bonds) |
| Priority in bankruptcy of the issuer | Last in line | Above shares (in case of bankruptcy) |
| Period of ownership | Unlimited | Limited by maturity |
| The impact of inflation | Yields may outpace inflation | Real yields may decline |
| Regularity of payments | Usually quarterly | Once every six months or a year |
| Fixed income | No | Yes |
Stocks and bonds are two fundamentally different instruments. A stock makes the investor a co-owner of the business. They receive a share in the capital, and with it, voting rights at shareholder meetings.
A bond, on the other hand, doesn't grant any ownership rights or the ability to participate in management—it's simply a form of loan: you lend money to a company or the government, and they promise to return it to you with interest.
In terms of returns, stocks are more unpredictable. Dividends depend on the company's profits, while the market value of shares can either rise or fall dramatically.
Bonds, on the other hand, most often provide a fixed income—it can be calculated in advance, especially for government securities. However, bonds generally don't appreciate in value—in most cases, you'll simply receive your face value back upon maturity.
Risk is another important distinction. In the event of a company's bankruptcy, shareholders are the last to receive their money, after all creditors and bondholders. This is why bonds are considered more reliable, especially government bonds. On the other hand, if a company experiences rapid growth, shares can generate significantly greater returns.
Taxes also differ. Stock dividends are often taxed at a higher rate than bond coupon income. Furthermore, the frequency of payments can vary: dividends are most often paid quarterly, while bond coupons are paid semi-annually or annually.
Which is more profitable: stocks or bonds?
When looking at yield, stocks can generally provide higher returns, especially for larger companies that pay dividends.
| Name | Type | Profitability, % per annum | Risk level | Frequency of payments |
|---|---|---|---|---|
| Enbridge Inc. (ENB) | Promotion | 7.4 | Average | Quarterly |
| British American Tobacco (BTI) | Promotion | 7.2 | Average | Quarterly |
| Altria Group (MO) | Promotion | 6.9 | Average | Quarterly |
| Verizon (VZ) | Promotion | 6.2 | Short | Quarterly |
| Philip Morris (PM) | Promotion | 5.8 | Average | Quarterly |
| Pfizer Inc. (PFE) | Promotion | 4.5 | Short | Quarterly |
| Chevron Corp. (CVX) | Promotion | 4.2 | Short | Quarterly |
| AT&T Inc. (T) | Promotion | 3.95 | Short | Quarterly |
| Enbridge 2029 Bonds | Corporate bond | 5.6 | Average | Once every six months |
| AT&T 2032 Bonds | Corporate bond | 5.2 | Average | Once every six months |
| Pfizer 2033 Bonds | Corporate bond | 4.7 | Average | Once every six months |
| Chevron 2035 Bonds | Corporate bond | 4.9 | Average | Once every six months |
| US 10-year bonds | Government bond | 4.3 | Very low | Once every six months |
| German 10-year bonds | Government bond | 2.6 | Very low | Once a year |
| Poland Bonds 2027 | Government bond | 5.0 | Short | Once every six months |
| Italy Bonds 2030 | Government bond | 5.1 | Average | Once a year |
For example, shares of companies like AT&T or British American Tobacco can yield up to 6-7% annual dividends. In some cases, dividend yields can reach 10% or more per annum.
In this case, dividends are paid from the company’s profits and, if there is none, payments can be completely cancelled.
Unlike stocks, bonds offer a more stable income. However, their yield can vary depending on the purchase price.
The highest yield on corporate bonds can be 10-12% per annum, but these are already risky bonds.
The safest government bonds, such as US Treasuries, yield around 2-3% per annum.
This may be attractive to those looking to minimize risk. However, if bonds are purchased at a price below par, their actual yield may be higher.
For example, if you buy a $1,000 par value bond for $950, your actual yield could be more than 3%, even though the coupon rate is only 3%.
Example: If you invest $100,000 in a 5-year bond with a 3% annual yield, but buy it at $950 per bond (par value is $1,000), you will receive more than 4% return over the year, since the difference in the selling price is also taken into account.
If you invest in stocks with a 6% dividend, you will receive $6,000, but it is worth considering that the price of the stock itself can either rise or fall.
Stocks and bonds each have their advantages and disadvantages. Stocks can generate higher returns, but they carry greater risk. Bonds offer a more stable income, but their yield can depend on the market price at which they are purchased.
In my opinion, it's best to diversify your investments, putting some money into stocks with good dividends and some into low-risk government bonds. Corporate bonds can be a versatile option.
