If You Only Invest in One Kind of Stock… Make It This One
The stock market has been rallying for almost a decade…
The Federal Reserve has begun steadily hiking rates…
And some of the biggest names in the world of dividends have started to lose steam because of those two factors.
Yet I disagree with pundits who say the “dividend trade” is over.
In fact, I don’t think those two words even go together.
You see, most investors buy things they like — fleeting ideas they happen to hear about on CNBC or a cocktail party, “flings” of trade opportunities that may or may not work out over the long haul.
But the best dividend stocks are investments you can buy once and love for the rest of your life.
Sure, many dividend-paying companies offer an immediate advantage over most other conservative retirement investments out there right now — namely, the ability to hand you more income right from the very first year of ownership.
Those dividends represent immediate non-refundable returns on your investment, and they continue to garner favorable tax treatment to boot.
Even with 10-year Treasury rates getting close to 3%, most of my favorite dividend stocks still pay more annually. Plus, the companies are actually in better financial shape than the U.S. government!
“Sure,” you say. “But a stock market crash could wipe out those yields five times over.”
It could, at least temporarily. Hey, every relationship has some rocky moments.
Just remember a few more things…
First, many dividend-paying companies operate less economically-sensitive businesses.
Second, over time it’s far more likely that you will reap substantial capital APPRECIATION by staying the course in these same dividend stocks. And…
Third, unless you’re investing directly in government bonds and holding them until maturity, you still have risk of capital losses. That’s especially true if you’re using mutual funds and ETFs.
Moreover, history shows that dividend stocks hold up very well during market drops.
For example, a study from fund management company ProShares showed that high-quality dividend stocks can do well during very short-term market drops.
They looked at the performance of their S&P 500 Dividend Aristocrats ETF (NOBL), which contains companies with long histories of rising dividend payments, and found that the ETF fell just 5.1% vs. a 10.3% decline for the broad S&P 500 when the market experienced one of its bigger pullbacks back in the first quarter of 2016.
Better yet, the ETF also kept pace with the index as the market began recovering and then pulled away by March 31st — ending the first quarter up 6.6% vs. a 1.4% gain for the S&P 500.
Or just consider 2008, the worst year for stocks since the Great Depression: Dividend stocks outperformed non-payers by roughly 6%.
And there is similar proof going even further back in history: In 2002, the S&P 500 fell 23%. Shares of non-payers in the index fell 30% while dividend-payers dropped just 11%.
So whether you’re interested in income, downside protection, or both… dividend stocks are a great place to be.
And here’s the single biggest reason to favor dividend stocks for the long-term…
Let’s say you have $10,000. And let’s say you buy that 10-year Treasury bond to get a year for the next decade.
Where does that leave you?
Your yield will barely cover the rising prices of health care, rents, or college tuition.
Remember, your yield is locked in. It never goes up. That’s bad.
Worse, at the end of ten years your principal will be exactly what you started with — $10,000 and not a penny more.
So you get zero growth in your nest-egg.
You add nothing to your retirement fund, your children’s college fund, or your “just-let-me-enjoy-life” fund.
You get a dead end precisely when you need an open highway.
In contrast, many dividend stocks are not only paying out better immediate yields than government bonds… your annual income could continue going up every year in the future.
You see, most investors just look at a stock’s current yield. That’s a big mistake.
Far more important is the fact that many companies have raised their dividends annually for many decades (even a century or more!).
Over time, this means you’re getting larger and larger annual yields on your initial investments.
The best part of this principle, called “yield on cost,” is that it applies to all dividend-paying stocks.
As long as you buy into companies that are boosting their payments, your effective yields will keep going up… and there’s absolutely no limit to how high they can go!
So it’s entirely possible to start earning relatively safe annual returns of 3%, 4%, or 5% right now. Moreover, when you choose the right stocks, it’s equally likely that you will end up collecting relatively safe annual yields of 8%, 9%, or 10% by the time the Fed even gets its interest rate target back above the yields being offered by dividend stocks right now.
To a richer life,
Editor, The Rich Life Roadmap