In a low-interest-rate environment, are dividend-paying stocks the best way to get income?

first_img See all posts by Jonathan Smith Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we’re offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our ‘no quibbles’ 30-day subscription fee refund guarantee. I’m sure you’ll agree that’s quite the statement from Motley Fool Co-Founder Tom Gardner.But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.What’s more, we firmly believe there’s still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.And right now, we’re giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool. Simply click below to discover how you can take advantage of this. Enter Your Email Address Our 6 ‘Best Buys Now’ Shares Following the huge impact of the Covid-19 pandemic, the Bank of England cut interest rates twice in quick succession. This means that the base rate here in the UK is just 0.1%. Given the size of the disruption the pandemic is causing (just look at the slump in the FTSE 100 index), rates are unlikely to be raised any time soon.As investors, we need to find other ways to make our money work for us. Leaving our money in a Cash ISA or some other form of savings account is just not going to cut it. In order for the money to generate income, we are going to have to take on some added risk in order to get a greater reward.5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…And if you click here we’ll show you something that could be key to unlocking 5G’s full potential…What rate of interest are we looking for? Everyone is different, so there is no one answer here. However, the latest reading of inflation came out at 1.7%. This means we need to generate at least 1.7% in interest just to stop the value of our money being eroded by inflation. Anything above that becomes real yield, which is what we want.How stocks can help with low interest ratesMost businesses within the FTSE 100 pay dividends. This has given rise to a common financial ratio of a dividend yield. This seeks to compare the size of the dividend with the share price of the firm. When you see what proportion of the share price is paid as a dividend, you can obtain a percentage value. You can then use this almost as a proxy for an interest rate.Let us take an example. One of the largest firms in the FTSE 100 index is GlazoSmithKline. It currently has a dividend yield of 5.18%. While this isn’t officially an interest rate, we can use it as a fair comparison. How does it compare to other income-paying assets? Well, we have already seen above that interest rates are 0.1%, so it beats savings accounts easily. Bonds pay a coupon, which is classified as income. Yet the yield on a generic UK Government bond is only around 0.5%. So again, a dividend-paying stock offers a substantially higher income for an investor.Higher income, higher risk?One point investors should note is that receiving income from a dividend-paying stock does come with higher risk than a Cash ISA or bond. This is because dividends can be cut or reduced, depending on company performance. ITV is an example of this, recently cutting the dividend in response to the virus.Further, there is volatility in the underlying share price of the firm whose shares you buy. While you lock in the dividend yield with the price you paid for the share initially, this price does change. Yet even with the higher risk, I still feel dividend-paying stocks are the best way to get income at the moment. This is because the dividend yield is so much higher than other assets. I would take a 5.18% yield from GlaxoSmithKline, and stomach the potential movements in the share price and risk of a dividend cut. There are other companies whose dividends appears to be safe, and have low volatility, such as Imperial Brands, Taylor Wimpey and M&G. Check out my Motley Fool colleague Roland Head’s view of their dividends here. In a low-interest-rate environment, are dividend-paying stocks the best way to get income?center_img Image source: Getty Images. Jonathan Smith | Tuesday, 14th April, 2020 Jonathan Smith does not own shares in any firm mentioned. The Motley Fool UK has recommended HSBC Holdings and ITV. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors. I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. 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