Dividend Investing: Great Cash Flow but What about the Volatility?
If you love the idea of generating a passive income with a few wise decisions, dividend investing sounds very enticing. However, it’s no insider secret that volatile markets can make dividend investing far less attractive than when the stock market is steady. In the absence of economist-level financial acumen, it’s also difficult to determine when that volatility will hit.
If you’re not interested in avoiding dividend stocks on the basis you may lose money, it’s likely that you want to maximise your chances of reaping financial rewards instead. For the sake of reassurance, it’s worth learning more about what happens when the markets become volatile and how you can mitigate the risks.
Dividend stocks are the safe high ground
There’s no point in claiming that dividend stocks are completely immune from volatile markets. However, when the financial world does start to look shaky, they act as the high ground where investments are safest. This is because they don’t rely on capital gains as much as other stocks. In contrast, growth stocks rely on capital gains entirely, so while they have excellent potential they also carry worrying risks. Because of this, if investing in stocks is a firm part of your financial future, prioritising dividends could act as your safe bet.
The reliability of dividend-paying companies is difficult to question
It’s worth acknowledging that dividend investing does mean relying on capital gains to a small degree. However, as these types of stocks are usually issued by companies with a strong history of paying dividends and excellent financial backing, there’s less of a descent when volatility hits. Ideally, if you are going to invest in dividend stocks you’ll prioritise the businesses with the strongest records and the most reliable plans.
Dividends can act as a shield against highly volatile markets
There has been plenty of periods where stock market volatility has made the investing waters more than tumultuous. One of the best examples from recent memory is the recession of 2008. Although the markets have improved significantly since then, there are fluctuating periods of volatility featuring 500-point up and 500-point down moves that often feel unnerving. To traders, these moves aren’t as terrifying. But as an investor, you might want to remain in the market while shielding yourself from losses. When this is the case, investing in dividends means you’re likely investing in companies that can remain profitable or recover quickly during these volatile periods.
If you’re confident that dividend investments are right for you, it’s worth taking further steps to protect yourself against volatility. Don’t make the mistake of assuming that dividend yield is enough. Turn to those companies that have a strong history of stable and rising dividend periods when the market is volatile. If it looks as though the company’s dividend payments are erratic, back away slowly. You should also try to anticipate future financial challenges, such as mergers and acquisitions. When they’re on the horizon, strong dividend payments are less likely for you as an investor.
Overall, see dividend stocks as a wiser choice when the markets are volatile. But always remain wary of the fact that they’re not entirely risk-free.
This website contains general information only and is not intended to provide any person with financial advice. It does not take into account any person's (or class of persons) investment objectives, financial situation or particular needs, and should not be used as the basis for making investments.