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?