As we approach the New Year, passive income-generating dividend shares strike me as perhaps the best option for my money. I can use these investments, often considered safer and more reliable than growth stocks, to boost my wealth with one eye on a plentiful income source in a few years’ time.
It’s been tough picking any shares lately. The FTSE 100 has disappointed us again in 2023 – yet another year of underperformance since Brexit. Throw in inflation and interest rates being higher than we’ve seen for 15 years and, well, boring but safe dividend shares sound pretty good to me.
As a refresher, dividend stocks are shares in a company that pays back a portion of its earnings, usually in the form of a dividend. Compare this to growth shares, sometimes seen as more risky, where I’m hoping to make money from the value of my shares increasing a lot over time.
Significantly up
Investors love shares that pay out regular dividends, especially when the economy underperforms. The FTSE 100, for example, is still below where it was in 2017, but if I had focused on dividend shares I would be significantly up on my investment from those payments.
And as the year draws to a close, I’m not optimistic about the short term. The economic outlook is bleak and I’ve even seen analysts predict a 60% chance of a recession next year. Hopefully it doesn’t come to that, but if it does, I might look back on late 2023 as an opportune moment to pick up these quality dividend shares.
High interest rates pose problems too. It doesn’t seem like the Bank of England will bring interest rates below 5% until 2025 now, and perhaps even beyond that. High rates for borrowing make it harder for companies to invest and grow. That’s another strike against owning growth stocks.
All these short-term issues do make dividend-paying shares look attractive right now, but I should point out the risks here too.
Risks
While dividend shares sometimes offer a more reliable return on investment, those cash payments aren’t guaranteed. Dividends are paid out of earnings, so a sharp downturn can put them on the chopping block. The 2008 and 2020 stock market crashes both put paid to a number of firm’s payouts.
And while dividend shares can offer a safer income stream, it might be smaller too. The big upside from stocks is not always from the biggest dividend-payers. Rather, it can be from the companies that use their earnings for growth. If I focus my portfolio on these shares, I may not get the best return possible.
My move
Still, while I don’t have a crystal ball, the evidence suggests we’re in for a rocky year or three. For that reason, I’m buying safer investments at this time. I intend to scout around for the best dividend shares available. And I’ll happily reinvest any dividend payments to help them build up even further. Hopefully, I’ll be pleased with my purchases further down the line.
