By Josh Arnold for Sure Dividend
Volatility and market downturns are inevitable in financial markets. It is more important than ever to maintain an investment strategy during turbulent times. Bear markets make it an emotional challenge for investors to stay the course. However, times like these can be an excellent opportunity to buy dividend stocks at discounted prices.
When looking to invest in tough times, it is still prudent to start with the best-of-the-best of dividend investing. One place to find such stocks is the list of Dividend Aristocrats.
The Dividend Aristocrats are a group of just 65 stocks in the S&P 500 Index that have all increased their dividends to shareholders for at least 25 years. Therefore, these stocks have proven successful through challenging periods like this before. This article will explore the advantages of investing in high-quality dividend stocks during volatile economic periods.
Rocky periods in the financial markets have several painful consequences. When prices fall, wealth declines as well. That can lead to panic selling investors should avoid. It also means that some investors can lose sight of the end goal in favor of stopping the short-term pain experienced as the value of their portfolio declines. However, these times create the opportunity to pick up outstanding dividend-paying stocks at discounted prices, resulting in a better value proposition with higher yields.
Buying high-quality companies at higher yields and lower valuations is perfect for long-term wealth creation; it also enables investors to earn income while capital gains are difficult or impossible to achieve at the same time.
After all, if we’re advocating for buying in down markets, the capital must come from somewhere. One way to do this is through investing savings or labor income, such as regular investments every pay period or monthly. Yet another way is through dividend reinvestment.
Dividend reinvestment involves taking one’s dividend income and reinvesting that cash in more shares, rather than saving it or spending it on expenses. Over time, this has a double compounding effect on an investor’s portfolio while the investor’s equity builds more quickly, compounding gains on both the original position and the dividend reinvestment.
If an investor needs their dividend earnings to contribute towards their living expenses, dividend reinvestment may not be feasible. In that case, it is even more prudent to focus on dividend investing. 2022 has shown investors what can happen to capital gains if market participants become fearful.
Now, let’s take a look at the case for dividend growth investing.
Dividend growth investing has many advantages and unique qualities. For instance, it can be a hedge against inflation. Consumers, businesses, and even investors have been affected by inflation in 2022, and this is another area where dividend growth investing can help.
Lowe’s Companies (LOW), the chain of about 2,000 home improvement stores across the US, has paid rising dividends for six consecutive decades. It has also boosted its dividend, on average, by more than 20% in the past ten years. Investors who held those shares saw their income grow exponentially and outpace inflation by a wide margin.
Dividend growth investing is also taxed advantaged; this makes it an excellent option for generating earnings. Primarily, the tax is calculated at a much lower rate than other types of income. The tax rate can be anywhere from 0% for low-income earners to about half of the highest bracket in the US on labor.
Other asset classes such as real estate investing, fixed-income investments, and corporate bonds carry a higher tax burden than dividend growth stocks. For this reason, dividend growth stocks continue to be an attractive option for investors.
Lower tax rates are important to investors who can reinvest more of their own money and grow their wealth more quickly. Over ten years, the value of a portfolio will be significantly higher when paying less tax making dividend stock investing a clear choice.
Tumultuous periods in financial markets, such as what we’ve seen in 2022, remind us that staying the course on a proven strategy is preferable to panic selling and shifting focus to the short-term. Remember that these situations result in opportunities to build positions in high-quality companies that pay rising dividends over time.
Dividend stocks are preferred because other types of income generally don’t rise over time, or if they do, not as quickly as dividend growth stocks. You can hedge against inflationary pressure while achieving increasing amounts of income. Finally, since stock dividends carry a lower tax burden, they are an excellent option for successful long-term investing.
All kinds of income-focused investors can benefit from dividend growth stocks in their portfolio, particularly when they’re available with higher yields and lower valuations, as many are today.
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Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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