The tales behind dividend stocks and investments during the bear market. Would it give more returns in the long run, or is it the other way around?
Without a doubt that investments, especially in the stock market, has significant risks and reward. As most people say, higher risk comes with better rewards. However, is it worth the risk of putting our hard-earned money in dividend stocks while we are in the middle of a bear market? Let’s find out!
For those who are not familiar with the term, it is the market trend where the financial market and investments fell to the 20% mark or more compared to the most recent 52-week high. If this happens, we’ll have to look out for potential changes in the financial market landscape.
Many financial advisors agree that the dividend policies of most companies show a lot when it comes to the company’s growth and sustainability for their future earnings. If companies offer dividends to their investors, that clearly showcase the confidence they have with their company’s performance even if the market is not performing well. This is also the secret of most startup companies that show massive potential in the market.
On the other hand, companies that offer dividends at times like these most likely believes they will benefit further if they provide a portion of their income rather than reinvesting it back to the company. However, not all small and fast-growing companies follow that suit, and it all depends on their company’s strategy.
Dividend stocks may not be everyone’s cup of tea. However, dividend stocks really prove their worth over long-term investment horizons.
Bear markets might become your best friend if you like long-term investment horizons, and reinvested dividends will also play a vital role in this.
Hartford Funds’ recent study shows dividend is a vital piece behind the success of S&P 500’s returns. They illustrate that from 1970 all the way up to 2019, the reinvested dividends sums up for about 78% of the total return index. With compounding in the equation, it means that the $10,000 we invested in S&P 500 in 1970 would translate to around $1,636,370 in 2019.
With the help of dividends, we can be sure that our investments would grow in time even if our stock value depreciates during a bear market. We need to look for a reliable company with a track record of substantially increasing dividend payments throughout the terms and we should be fine even if we are in a bear market.
We also need to take note that stock market values during a bear market season mean lower prices of stocks. We can take advantage of this and puts our financial situation in a perfect spot.
Dividend-Paying Stocks Versus Bonds
Throughout the course of bonds, we usually get around 5% returns. That means we could typically get around $5,000 for a $100,000 portfolio. However, if we are in the middle of a bear market economy, we could consider ourselves lucky if we could get 1% to 2% returns.
On the other hand, dividend-paying stocks will most likely increase over time. A prime example of this would be the companies in the S&P, where we saw a steady increase in the dividend payouts consistently in the last 25 years.
Bear Market, Dividend-Paying Stocks, and Equity Investments
Overall, investment is considered a risk. It all depends on how we should handle those risks and how to maneuver our money in the right direction.
We have to keep in mind that equity investments are considered volatile, especially during a bear market. Stocks constantly changes and short-term strategies might not work in our favor. However, closing our deals only for dividend-paying stocks may limit our options for outstanding companies on the market. An example of a good company that never provides any dividend would be Berkshire Hathaway.
We need to take a look at a broader picture if we are looking for dividend-paying stocks. Some of them may offer “too good to be true” deals, so be on the lookout for market and company trends.