As we all know; there are a lot of dividend investors in the market. Some like the thought of getting paid quarterly, others think it is the best growth model for an investment portfolio but all agree that dividend investing works. And it sure does. But I am under the impression that this investment strategy will gain even more momentum in 2011.
Dividend Investing is Solid
For those who are looking for long term portfolio growth, dividend investing seems to be a very interesting model. We can follow dividend aristocrats who paid and increased their dividends for decades providing investors better returns than the S&P 500. You have a long history to compare different models and look at the volatility of each of them. What I really like about dividend investing is that it is not the flavor of the month; it has been around for decades.
Regardless of what happen to the market, the dividends prevail
Another interesting point for dividend investors is that no matter what happen in the market, you will, for the most part, receive your quarterly dividend. You may run into dividend cuts during severe recessions but your overall portfolio will still generate cash flow. In many cases, it is enough to encourage the most desperate investors to stay on board during the storm. We all know that we should not sell our stocks during a market slump, but the psychology aspect of our trades can lead us to make huge mistakes. In those cases, dividends play the role of an additional barrier (second thought) before selling.
Dividend equals cash flow
Dividends have always been very seductive by way of their quarterly payment. Earning extra cash has become a major topic in investing and personal finance. So I guess that more and more individuals will look towards this “easy” solution to earn an extra buck.
But most importantly: WHERE ARE YOU GOING TO FIND YOU YIELD IF NOT IN DIVIDENDS?
I think this will become a major issue for many retirees who thought buying bonds or certificates of deposit would generate enough cash flow. The problem is that we have entered a low (very low!) interest rate economy since the end of 2008. We thought in 2009 that it was a only a bad point in time to hold our breath where most conservative investors looked towards short term bonds or money market securities. They thought they could wait 12 months or so and jump back into bonds or CDs around 4-5%. Yet here we are at the end of 2010 and we are still waiting for yield.
As I have previously mentioned on this blog, I seriously think that dividend stocks are undervalued (as are many other stocks on the US market). This could be an opportunity of a lifetime. And as interest rates are super low when you consider “safe investments”, buying undervalued stocks providing a steady payment sounds a logical choice for retirees.
This is why I feel that more and more brokers will recommend such portfolios and more independent investors will move a part of their money (probably coming from a 1-2% money market) towards dividend stocks paying 3-5%.
On top of their yield, they could also provide tax advantages and capital gains. Does this not sound like the perfect scenario? Maybe too much… there must be something I don’t get. What do you think?
Most of what was said in this article is quite correct. For people seeking income there are basically only a few options. Bonds, which unless we are entering a deflationary period are yielding to little. High yield bonds which are getting gobbled up
along them too cheap for the amount of risk. Preferred sharees which are probably also yielding to little but more importantly come in many flavours that are not all created equal. Convertible debentures of which I have very little knowledge. Finally there are the dividend stocks. If as mike states many people are starting to see the light then yes it is likely that dividend stocks will appreciate. Unfortunately as demand goes up this does bot automatically bring on new supply. Inevitably this drives down yield until the yields of bonds become attractive again. Ultimately the end result is that valuations get stretched until the risk reward goes up.
The end result is that this situation really only benefits those who got in early. Either interest rates will take the air out of dividend stocks or valuations will take the rewards out of the dividends. Or something like deflation will take a toll on tje values of the dividends. As for the current valuations I think they are still reasonable but I don’t think they are screaming buys at this point. The only way to tell is by looking at lots of historical data. 10 year p/e 10 year average yield etc. All in all as I am investing for the long term I really would rather that dividend stocks were a screaming buy.
Just my 2 cents