Use Dividend Stocks to Dial Down Your Market Worries
If you’re worried that stock records won’t last, the boost that dividend stocks provides over the long term could be a calming cushion.
While most investors are publicly celebrating this record-setting bull market, many tell me in private that they’re nervous about the possibility of a downturn.
People have different reactions when the market does so well for so long. Some are sure they should get out, but greed won’t let them pull the plug. Others are eager to get in on the action, but fear won’t let them pull the trigger.
I tell clients to base their decisions on their long-term plan, not what’s happening day to day. Staying on a steady course is always key in investing, but especially in uncertain times.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
One of my favorite ways to add some stability to a portfolio is with a thoughtful dividend strategy — especially if you can reinvest those dividends instead of taking them as income.
What’s the payoff for patience?
Let’s hypothetically say you had put $10,000 in an investment that perfectly matched the S&P 500 at the end of 1960. If you had taken the dividends as cash and not reinvested them, at the end of 2015, your $10,000 would have grown to $351,000.
Not bad. But if you’d reinvested those dividends, you’d have just shy of $1.9 million.
Jaw-dropping, right?
Now, you may not be able to wait 55 years, but even 10, 20 or 30 years could bring you some pleasing results.
And the thing is that most folks, if they’re still working and earning a paycheck, don’t need that dividend income. Oh, it might pay for a vacation every couple of years or so. But if you can keep your hands off and reinvest it, there’s a good chance you’ll see exponential growth. It’s one of the easiest and least expensive ways to increase your holdings over time.
And even after you retire, you may choose to continue growing those investments as you pull from other income streams.
There are various way to handle reinvesting:
- You can enroll in a dividend reinvestment plan (DRIP).
- You can buy a low-cost fund that automatically reinvests distributions for you.
- Or you can stockpile the cash until you decide to make a purchase on your own. (I’d avoid the third option unless you are both market savvy and extremely disciplined.)
Keep in mind that, no matter which method you choose, this is a slow process. You’re not looking for the next big thing, and you want to stay far away from the big thing that’s almost over.
Don’t make the mistake of simply choosing stocks that offer the highest yields possible. Over time, those stocks have not performed as well as those that pay high, but not the very highest, levels of dividends. Why? Sometimes a company will declare dividends to grab investor interest and boost share price, but then it can’t sustain those payments. And if there’s a dividend cut, the market might read that as a sign of weakness.
Look, instead, for stable, well-run companies that pay constant or rising dividends — companies that are going to be here for a while. For example, iconic American brands, even though they may be in mature industries, can be terrific investments. I’m pretty confident we’ll be eating at our favorite fast-food restaurants, drinking popular soft drinks and using those brand-name laundry detergents for years to come.
But do your homework, because even consistent dividend payers can develop problems.
Talk to your financial professional about how dividend stocks might work in your portfolio. Be sure to ask about tax consequences (good and bad) and how your strategy might affect your overall retirement plan.
Most important: Know thyself.
If you are a patient, careful investor, dividend stocks may be just the thing to help take your market anxiety down a notch.
Kim Franke-Folstad contributed to this article.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Michael R. Andersen is the founder and president of Andersen Wealth Management, a Registered Investment Adviser. He is an Investment Adviser Representative and a licensed fiduciary. A firm believer in financial education, Andersen holds regular informational seminars for clients and the community, and he is the host of the "Wise Money" radio show.
-
Premium Tax Credit: Are You Eligible For This Health Insurance Tax Break?
Tax Credits The tax credit can help qualifying individuals pay for coverage from the Affordable Care Act’s health insurance marketplace.
By Gabriella Cruz-Martínez Published
-
Winners and Losers of Fed Rate Cuts
Navigating interest-rate changes can seem daunting, but these areas of the fixed-income market could perform better (or worse) than others.
By Jeffrey R. Kosnett Published
-
Six Ways to Optimize Your Charitable Giving Before Year-End
As 2024 winds down, right now is the time to look at how you plan to handle your charitable giving. The sooner you start, the more tax-efficient you can be.
By Julia Chu Published
-
How Preferred Stocks Can Boost Your Retirement Portfolio
Higher yields, priority on dividend payments and the potential for capital appreciation are just three reasons to consider investing in preferred stocks.
By Michael Joseph, CFA Published
-
Structured Settlement Annuity vs Lump-Sum Payout: Which Is Better?
As the use of structured settlement annuities grows, it can be tough to decide whether to take the lump sum to invest or opt instead for guaranteed payments.
By H. Dennis Beaver, Esq. Published
-
What to Do as Soon as Your Divorce Is Final
Don't delay — getting these tasks accomplished as soon as possible can help you avoid costly consequences.
By Andrew Hatherley, CDFA®, CRPC® Published
-
Many Older Adults Lack Financial Security: What Can We Do?
Poor financial literacy and a lack of foresight have led to this troubling reality. It's going to take tax policy changes, education and more to address it.
By Ryan Munson Published
-
Winning Investment Strategy: Be the Tortoise AND the Hare
Consider treating investing like it's both a marathon and a sprint by taking advantage of the powers of time (the tortoise) and compounding (the hare).
By Andrew Rosen, CFP®, CEP Published
-
How to Fight Inflation's Hidden Threat to Your Savings
If higher prices are putting your savings goals on hold, you're in danger of financial erosion. Fortunately, several strategies can help stop the spread.
By Kevin Brauer, MBA, CPA, CMA Published
-
10 Inefficiencies I Look for on Rich Retirees' Tax Returns
Your tax return could hold clues to several missed opportunities and important gaps in your retirement planning.
By Evan T. Beach, CFP®, AWMA® Published