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.
-
Amazon Prime Day: Get 5 Months of Unlimited Music for Free
Deal Amazon Prime Day 2024 deals include a free five-month trial of Amazon Music Unlimited.
By Sean Jackson Published
-
Honeywell Is the Best Dow Jones Stock After Elliott Discloses a Stake
A breakup of Honeywell's businesses could result in major upside for the blue chip stock over the next two years, the activist investor says.
By Joey Solitro Published
-
How to Plan for Retirement When Only One Spouse Works
When you're married but only one spouse works, leaving retirement planning to the working partner puts financial security at risk. A joint effort is vital.
By MaryJane LeCroy, CFP® Published
-
Can a Judge Tell a Father to Avoid Risky Triathlons for His Sons?
Mom wants Dad to quit participating in triathlons, which are known to have a higher risk of sudden cardiac death, but would a family law judge force him to stop?
By H. Dennis Beaver, Esq. Published
-
Should You Trust Robo-Advisers With Your Retirement?
Why use a financial adviser when you can get retirement planning tools online? The simple answer: Tech can't yet replace nuanced advice from a professional.
By Scott Noble, CPA/PFS Published
-
Unpaid Caregivers Soon May Get Help to Save for Retirement
Two proposed bills aim to open new doors to caregivers for contributing to Roth IRAs and making catch-up retirement contributions.
By Dr. Lamell McMorris Published
-
Time for Some Fall Financial Maintenance: Here's a Checklist
As you rake the leaves and clean the gutters, you should also consider tackling seven key year-end planning chores.
By Adam Frank Published
-
Want Your Kids to Inherit? You Need an Asset Protection Plan
You've worked hard for your wealth. Don't let it fall into the wrong hands. Consider prenups, trusts and other protections to safeguard your family legacy.
By Tracy Craig, Fellow, ACTEC, AEP® Published
-
Five Tax Strategies to Help Your Money Last in Retirement
Having a tax strategy is crucial to making your money last. These tax-saving moves can help, whether you're years from retirement or already there.
By Scott M. Dougan, RFC, Investment Adviser Published
-
What Does the Term 'Full Coverage' Really Mean in Insurance?
For starters, there’s no such thing as 'full coverage.' Instead, you should tell your insurer exactly what kind of protection you're looking for and for what.
By Karl Susman, CPCU, LUTCF, CIC, CSFP, CFS, CPIA, AAI-M, PLCS Published