P2P-lending vs Dividend investing

Peer-to-peer lending: more risk, more return

P2P -lending has become more and more popular in just a couple of Years. Peer-to-peer lending basically means that you lend money to individuals or businesses through some online platform/service.

One example would be Mintos, which is established P2P-player in Europe. One has to just land some money to the platform and invest it in different loans. Diversification is important here, as some of the loans will never be paid back. Luckily, Mintos has a buyback guarantee which basically means that the loan originator will buy the loan back from the investor if it happens to be late more than 60 days. If you don't invest in loans that have a buyback guarantee, you usually get higher interest rate but also lose some of your money, because certain percentage of borrowers never pay their loans back. P2P -lending platforms usually provides pretty good interest returns for investors: usually from 9% to 12%.

Screenshot from my Mintos P2P -account

P2P-lending can be quite profitable, as you can see. Lots of new P2P-platforms have established their services in past 2-3 years. However, if we enter into a recession or global economic growth slows down too rapidly, P2P-lending can be very risky business. P2P-platforms have not yet been tested properly during any big recession. During a bear market it would only be natural if P2P-borrowers would not be able to pay their high-interest loans because of personal bankruptcies.

Dividend Investing: Relatively safe and secure

Dividend investing is an old way of accumulating wealth: you pay shares of businesses that do very well and thus are able to pay you dividends. Usually those dividends have a tendency to grow every year, if you decide to focus on these solid companies that have very good track record. Historically, companies that have been able to pay big dividends, have also been safe bets also with their growing share prices. Of course, during a bear market, there are very few stocks that actually rise. On the other hand, during the bear market, these dividend stocks are on sale. 

Compared to P2P-loans, dividend yields are not as big and juicy, but dividend yields are not the one and only thing you should focus if you invest in dividend stocks. While dividend yeilds are usually 0-5% annually, P2P-loans usually earn you 9-12% profit annually. However, dividend investing means that you buy shares of the company, which also means that the share prices can (and usually will) go up. Thus, dividend investing might be more profitable thatn P2P-lending in the long run, or vice versa. Who knows that? 

Dividend stocks usually earn the biggest capital gains 

It is not too easy to compare dividend investing and peer-to-peer lending. Both have their pros and cons. One thing to remember is, that P2P-investing has not been around that long, so please do not put all your eggs in one basket :) !

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