Ask any expert, and they will tell you that future returns in the stock market will be uncertain, and volatility could be the new normal. But it is not a gloom and doom market forecast. Instead, investors should maintain careful optimism and remain invested in the stock market, albeit fully hedged against uncertainty and volatility.
A great way to stabilize your portfolio and generate returns in an uncertain economy is by investing in dividend stocks. Although it carries some risk, the potential rewards may be worth it!
Is dividend investing right for you? One can consult their financial advisor to understand what to buy and hold in their portfolio. When diving into dividends, let me break down six long-term rules every savvy investor must know.
Rule 1: Quality and not Quantity matter
When picking investments, that dividend yield is crucial. The higher, the merrier, right? But hold on, don't be fooled! If a company can't sustain those juicy dividends long-term, they might dry up faster than water in the desert. For example, Real Estate Investment Trusts (REITs) are susceptible to market fluctuations impacting their dividend payouts.
Sometimes, it's wise to opt for stability, even if it means less short-term yield. A low-risk dividend stock may generate slightly less income, but it's likely to be more reliable over time.
Rule 2: Established Companies are the way to go
The stock market is a bit like a rollercoaster, always up and down. So, when it comes to dividends, check out a company's past performance - it's like a measuring stick. Aim for those "dividend aristocrats" - established companies that have consistently increased dividend payouts for 25 years. They're like reliable friends one can count on.
Rule 3: Look for Growth Potential
Understandably, new companies may tempt one with impressive dividends, but wait to jump in! One must do their homework, folks! Past and present returns are necessary but don’t forget to study their future potential to keep those dividends flowing.
This is where growth investing comes in - forget the stock's current price and focus on its long-term growth potential for dividends.
Rule 4: Be Wary of the Payout Ratio
Safety first, right? A company's dividend payout ratio is a good indicator of how safe your investment is. It tells you what they pay out to shareholders and how much they can retain.
So, if you come across a high-yield dividend stock with a big chunk of its income going to investors, be cautious. The dividends might be on the chopping block if their income stream takes a hit.
Rule 5: Diversify, Diversify
Now, there's no one-size-fits-all approach. Concentrating on a handful of stocks or a particular market sector can be tempting, but remember, diversification is key!
Spread assets across multiple dividend-paying investments. When one area takes a hit, the rest of the portfolio can help cushion the blow. It's like having a safety net for one’s cash flow.
Rule 6: Know When to Stay and When to Exit
Ah, the age-old wisdom! Taking the long view is essential, just like most experts say. But even they know when to cut their losses. It's a tightrope; one must walk.
One can find a stock that looks like a hidden gem but only cling on mindlessly if it's delivering growth as promised. Recognizing when to act and when to wait can make all the difference.
So, in a nutshell, dividend investing can be one’s secret weapon. Stick to these guidelines, evaluate wisely, focus on solid returns, minimize risks, and keep things diverse.
The writer of this article is Sanjeev Anand, Wholetime Director and Head of Business Excellence, Research & Ranking