Shares have fallen over the last 10 years. It still feels like we're in recession. It must be time to completely avoid the stock market. Or is it?
Two enormous recessions. Unparalleled government bailouts. An entire lost decade of growth.
It's been more than 10 years since the tech boom, and most of us have about the same net worth as we had in the first place -- or possibly less. The result of this flat and oftentimes irrational stock market has been a media rush to call "an end" for the average buy-and-hold investor.
The rumour mill is circulating and in full effect: Get out of the stock market before it's too late!
Is this the beginning of the end for the stock market, or will predictions of shares' demise turn out to be the worst myth of the 2010s?
Where exactly are you going?
From 1980 to 2000, scholars like Jeremy Siegel and others were touting the wisdom of long-term, buy-and-hold investing; individuals and academics alike were virtually all on the same page.
In fact, one survey by a US Securities Industry Association in 1999 showed that most investors expected to earn a rate of return equal to about 30% -- confidence was at an all-time high!
Nonetheless, according to a recent article in US publication The Atlantic, the modern diversified portfolio, the ease of which we use technology, and the growing popularity of funds have possibly combined to erode our equity returns.
In fact, while most savvy investors used to expect an annual return of 8%-10%, there's plenty of chatter about that number being much closer to 4%-5% for years to come.
One US company, Smithers & Co., an asset allocation firm, has forecasted that the next 10 years in the US stock market will deliver a paltry 1.8%. So where do you go from here?
1. Savings: While it would be nice to allocate a large portion of our nest-egg in savings, it just isn't possible anymore. After introductory periods expire, savings accounts offer near-zero interest rates.
2. Bonds & Gilts: Corporate bonds and bond funds have had a great run. However, even the global bond guru Bill Gross expects lower returns. According to Gross, because rates have nowhere to go but up, "bonds have seen their best days." And this comes from a man who manages a $214 billion bond fund. Ouch. Gilts are not much better. The 10-year gilt currently yields a somewhat paltry 3%.
3. Government: There may have been a time when you could save what was possible and expect your employer and the government to fill out the rest. Most final salary pension schemes are now closed, and the state pension is under ₤100 per week for a single person.
The bottom line is that regardless of what pundits will say about the stock market, it's the main option you have left. You need individual shares to protect your portfolio.
Get back to basics already
Years ago, investing in dividend shares was all the rage. But then the market took off, technology and globalisation changed the way we invested, and dividends became boring or old-school.
Investors expecting those 30% returns certainly weren't going to find them in dividends -- hence the flock to the fast-growers and the small-caps with unlimited potential.
Yet things have changed, and if you're not investing in dividend shares right now, you're missing out on an amazing opportunity. Throughout history, academics have proven that dividend-paying shares outperform their non-paying brethren.
So in order to avoid the greatest myth of our decade -- that shares can't provide above-average returns -- you've got to start investing in dividend shares. In particular, you need to find shares that pay great yields, that reasonable dividend covers, and that have illustrated a knack for increasing their dividends over time.
To help you in your quest, we've highlighted five shares that not only fit the criteria above, but that are trading at cheapish valuations (to help ensure value).
| Company | Forecast
Dividend
Yield | Forecast
Dividend
Cover | Forecast
P/E
Ratio |
|---|
| Vodafone Group (LSE: VOD) | 5.8% | 1.8 | 10.0 |
| Tesco (LSE: TSCO) | 3.5% | 2.4 | 12.1 |
| Reckitt Benckiser (LSE: RB) | 3.6% | 2.0 | 14.3 |
| London Stock Exchange (LSE: LSE) | 4.0% | 2.5 | 9.8 |
| Melrose (LSE: MRO) | 3.8% | 2.4 | 11.2 |
All five of these shares fit the ideal dividend mould -- they pay good, sustainable yields, they have plenty of room to grow, and they are trading for more-than-reasonable prices. In addition, we tried to choose shares that would help create a diversified portfolio, so a number of sectors are covered, from telecoms to industrial engineering.
Don't believe the hype
There will always be people -- whether it be friends, colleagues, or professionals -- that employ fear mongering as a way to express their philosophy. However, while we agree that our investing world has certainly changed, we disagree with the notion that returns will be dismal and that you must avoid shares to ensure your financial safety.
Investing in dividend shares is still a prudent, reliable, and wealth-generating way to keep you on the fast track toward retirement. You may not get rich overnight, but you can certainly sleep well knowing that you didn't get bullied in the wrong direction.
More on the economy and the markets:
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> A version of this article, written by Jordan DiPietro, was originally published on Fool.com. Bruce Jackson, who has an interest in Vodafone, has updated it.
