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Fixed Term Versus Dividends

Written by R. A. Stewart

Two excellent wealth building vehicles are fixed term deposits and dividends paying shares. Both aim to put your capital at work but they operate differently as far as risk, return, and tax treatment goes.

Fixed-term interest

Your money is invested for a predetermined period of time, this could be for months or years for a guaranteed interest rate.

Investors in fixed-interest deposits know the return they are receiving on their investment.

Dividends

Dividends are made by the companies to their shareholders; they represent dividends of the company’s pot-tax profit.

Investors in companies on the share market do not know the return they are receiving. It is the directors who decide how much to distribute to shareholders.

Investors in the share market aim to receive a regular income through  dividends and capital growth of their shares. (share price appreciation)

Key Differences

Fixed-term interest

  1. Capital Preservation and Steady income.
  2. Low capital risk
  3. Fixed and guaranteed income
  4. May lag inflation depending on the interest rate.
  5. Money not available until maturity

Dividends

  1. Income growth and capital appreciation
  2. Moderate to high capital risk due to market volatility.
  3. Variable income depending on how well the company is doing.
  4. Shares have historically outpaced inflation.
  5. High liquidity. Shares can be sold when markets are open.

Which is more risky?

The main risk with fixed term interest is inflation risk where the purchasing power of your money decreases with rising costs. The other factor to consider is that the market rate of interest may increase during the time you are locked into a lower interest rate.

The main advantage with shares is that it can be quickly turned into cash when needed. The flip side to this is that the markets may be down just when you need that money but thanks to managed funds and micro investing platforms it is possible to invest in such a way as to minimize the risk of being on the losing side of a downturn in the markets.

It is a matter of investing according to your timeline.

If you need the money within twelve months or the money needs to be on call then a personal bank account paying next to no interest may be your best option. However, fixed term interest may be your best option, if you have $5,000 to invest and need that money for say, a car in six months to a year. Your other option if you are in that position is to invest in a conservative fund. Your money will be invested in shares but in less risky companies.

What about the medium to long-term?

Shares have traditionally outperformed returns on fixed-term interest in the long run. 

If your timeline is long-term then past history indicates that you are better off investing in shares.

It is important to stay calm when the markets are down and your retirement fund balance has dropped. Just continue to live your life, working and making contributions to your retirement fund and let the final balance take care of itself.

About this article

This article is not financial advice and may not be applicable to your personal circumstances therefore discretion is advised. You may use this article as content for your blog or ebook.

Read my other articles on www.robertastewart.com

 

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The Magic Power of Compounding

 

Written by R. A. Stewart

If you have any kind of financial knowledge you will know that the process of investing your money for years, sometimes decades and leaving your interest or dividends accumulate so that you end up earning interest off your interest is known as compounding.

Your investment starts to snowball once you have built up a decent portfolio. Using the process of compounding will enable you to achieve your goals faster.

Compounding also helps you to beat inflation which is a thorn in the side of those who are trying to get ahead in life. 

Investors who choose to have their interest or dividends paid into their bank account rather than have them added to their investment will find that their original investment will lose it’s purchasing power thanks to inflation. 

Your investing timeline is a big factor and the purpose of your investment.

If you are retired then you may prefer to have dividends paid into your bank account to help pay the bills and many do just that. The young ones usually let the income from their investments accumulate. This is common in retirement and mutual funds.

When you are saving for something then consider whether they are short-term, medium-term, or long-term goals. This matters because choosing the wrong type of investment for your timeline can affect how much you will end up with when it comes the time to cash in your investment.

For example it is not appropriate to invest your emergency fund in a growth fund due to it’s volatile nature because what is liable to happen is that just when you need the money the markets are down and there is less money available in your emergency fund than you thought there was.

At the other extreme, it is foolish to just leave your retirement fund in an ordinary savings account where you are paid minimal interest because inflation will erode the spending power of your money. 

Here is a break-down of the timelines of Short-term, medium-term, and long-term goals.

Short-term goals are within 12 months.

Medium-term goals are 1-5 years.

Long-term goals are over 5 years.

Getting into the habit of saving and investing will put you into a good position to withstand the financial shocks which life throws at you. This could be illness, job loss, family emergency, car breakdown, or anything else.

It takes vision to make some kind of provision for your future because you are preparing yourself for an event which may or may not happen. 

Then there are events which most people planned for such as buying a new car, further education,  saving for a house deposit, marriage, family, overseas trip, and retirement. People who have common-sense will make provision for events in their life which they expect to happen.

Investing your money for compound interest will help you to achieve your money goals sooner rather than having your interest or dividends paid to your bank account to spend. But it all depends on your personal circumstances.

About this article

This article is not financial advice and may not be applicable to your personal circumstances, therefore discretion is advised.

You may use this article as content for your blog/website or ebook.

Read my other articles on www.robertastewart.com

 

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