"Counting Your Pennies" Dividend Investing as an Investment Strategy | Economics Global

In this low-yield environment, dividend investing can be a solid way to generate income for your portfolio over time.

As the global economy continues to grapple with the COVID-19 pandemic, many companies have reduced, or even suspended, their dividends due to the ongoing uncertainty brought forth by the pandemic. This makes it difficult for one to decide whether dividend investing is beneficial in this uncertain environment.

While this macro backdrop may have investors questioning whether it is beneficial to focus on dividend investing, you might not want to completely write off the idea of allocating a portion of your portfolio to dividend-paying stocks for extra income. We believe this to be so, because given the historical growth of dividend payments, combined with the current low-rate environment, dividend-paying stocks are well positioned to be a solid component to your portfolio returns.

Here’s why we believe including dividend-paying stocks as part of your investment strategy will give your portfolio a nice income boost:

“Bearing Fruit?”: Why Should You Look at Dividend-Paying Stocks?
1. Dividends Provide a Great Income Alternative in Low-Yield Environments

With interest rates expected to remain at their historic lows for the foreseeable future, dividends are an attractive way to compliment your income stream, compared to some investment-grade government bonds offering low yields. For example, in the US, the spread between the S&P 500 dividend and 10-Year US Treasury yields currently rests at 45 basis points, currently favouring dividends. Thus, looking at your portfolio mix today, you may want to consider how some exposure to high-quality dividend stocks can help you increase your portfolio income over time.

2. The Financial Benefit of Re-Investing Your Dividends

Some investors tend to view the equity markets solely through the lens of capital appreciation. But if you are the type of investor that re-invests your dividends, the impact to your total equity returns over time can be quite beneficial. Dividend income from equities tends to grow over time, as opposed to bonds, where your income remains fixed. Putting a side the effects of capital appreciation, we can see how powerful dividend growth compounding can be over time. For example, assuming an 8% growth rate in your dividend income over a 10-year period, your income from dividends would almost double.

“Planting Your First Seed”: How to Start Investing in Dividend-Paying Stocks

If you decide to start adding dividend-paying stocks to your portfolio mix, make sure you do your due diligence. It can be tempting to only focus on companies that offer high dividend yields, but you run the risk of falling into a “Dividend Trap”. Therefore, always remember that a high dividend yield may not always indicate quality, and subsequently, not all dividends are created equal.

Before you begin to dip into dividend-paying stocks, there are a few things you may want to be mindful of to ensure that you are picking the best dividend-paying equities for your portfolio, and ultimately, for your financial goals:

  1. Business Model: Always analyze the stability of a company’s business model. Some “Blue Chip” stocks, especially those in “recession proof” sectors such as consumer staples or healthcare, have historically weathered past recessions with their dividends intact. 
  2. Executive Team: Always pay attention to a company’s management team and executive personnel, to see how long they have been with the company. Precisely, executives that have gone through challenging times in the past, can draw on their experience to help them through difficult periods in the future.
  3. Credit Quality: Lastly, always scrutinize a company’s credit quality to make sure it’s not overloaded with debt it can’t handle, and that it can borrow money if and when needed. In times of financial difficulties, too much debt can hinder a company’s ability to pay out dividends to its shareholders.

Just like any other type of investment strategy, there are risks to dividend investing that you should not ignore. But given the current environment, if you are looking to pick up extra income from your investments, you should give dividend-paying stocks a second look. 

Related Financial Education

For investors who are interested in other topics related to financial education, see our articles below:

Going Global – Investing in an International Landscape

Watch Out for the Dividend Trap

Finding Bargains Among Beaten Down Stocks

Related Macro Moments

“The Trend is Your Friend” – Long-Term Investment Opportunities

Related Portfolio Solutions

For clients who are interested in our recommended countries and regions, please refer to our Country and Regional Portfolio Solutions.
For clients who are interested in our recommended sector and industry, please refer to our Sector and Industry Portfolio Solutions.
For clients who are interested in our recommended income recommendations, please refer to our Income Portfolio Solutions.
For clients who are interested in our recommended global macro recommendations, please refer to our Global Macro Portfolio Solutions.
© 2020 Economics Global Inc.

Content Disclaimer
Any views expressed here are those of Economics Global Inc. as of the date of this publication, are based on available information, and are subject to change without notice. This document does not constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

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