Building a dividend stock portfolio at the present time could be a means of generating a generous passive income over the coming years. Valuations across the stock market are relatively attractive after the recent market crash, with many stocks offering wide margins of safety.
Furthermore, a lack of appeal among other income-producing assets may increase demand for dividend stocks in the long run. With stimulus packages having recently been announced in major economies, the growth prospects for many industries could improve significantly.
Low valuations in a dividend stock portfolio
Due to the stock market crash this year, it is possible to build a dividend stock portfolio that contains companies with low valuations. Yes, investor sentiment rebounded sharply after the market’s crash, but many companies still trade on valuations below their long-term averages. This may mean they offer relatively high yields that produce a generous passive income.
It may also lead to impressive capital returns in the coming years. Buying stocks when they trade at attractive prices has previously been a successful means of generating above-average total returns. As the stock market gradually recovers, your portfolio’s value could rise. This may make it easier to generate a passive income in the long run.
Relative appeal
A dividend stock portfolio may offer significantly greater income prospects than other assets over the coming years. Interest rates have been relatively low for a number of years. And they may now fail to rise rapidly as policymakers across the world seek to provide support to their economies. This could reduce demand for income-producing assets such as bonds and cash. It could also push many income-seeking investors towards dividend stocks.
Therefore, as well as offering a relatively high yield, dividend stocks could become increasingly popular among investors. This may help to push their stock prices higher, thereby leading to greater total returns for investors who hold them as part of a diversified portfolio.
Growth potential
Owning a dividend stock portfolio may not produce high returns in the short run. The prospects for positive global economic growth have rapidly declined over the past few months. And risks such as a second wave of coronavirus may continue to weigh on the outlook for world GDP.
However, the global growth outlook could be positively impacted by fiscal and monetary policy stimulus taking place in major economies. After all, stimulus packages implemented in the global financial crisis had a positive impact on asset prices and economic activity.
Although this may not lead to instant gains for dividend stock prices, over the long run it is likely to produce capital growth. Alongside the relatively high income returns available on many dividend stocks, the end result could be attractive total returns. I think that makes now the right time to start building a dividend stock portfolio.
