3 reasons why buying high-dividend-yield stocks can help during a market crash

Picking up dividend income can be a huge benefit when you see an unrealised loss from the share price, writes Jonathan Smith.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

After a record sell-off in trading on Monday for the FTSE 100, volatility is back after a couple of quieter days late last week. Given the larger sell-off we have seen from levels of 7,500 only a month ago, it is definitely worth thinking about how to position your stock portfolio in case the current correction becomes a crash.

Do not take this as a doom and gloom article by any means. I think that the risk sentiment pervading global stock markets at the moment will blow over once the coronavirus starts to recede. But until that happens (it could take several months), or if I am wrong, here are a few reasons why buying high-yielding stocks can be a good idea.

What are high-dividend-yield stocks?

Most companies within the FTSE 100 or 250 index pay out a dividend to shareholders on at least an annual basis. The dividend may change year-on-year depending on company performance. When you buy a share and receive a dividend, you can work out the ‘yield’ that this gives you. For example, if you paid 100p for a share that pays a 1p dividend, your yield is 1%. Usually if a stock yields above the FTSE 100 average (currently around 4.5%) it is classified as high.

Why buy high-dividend-yield stocks?

The main characteristic of a market sell-off is that the share price of the index constituents falls heavily. This is usually down to broader investor risk sentiment, and so is not always tied to the strength of an individual firm. The recent sell-off has highlighted this.

My first reason is that you may invest in a high-yield firm that is taking a hit via a lower share price. But this dividend should continue to be paid if the firm is still financially sound and not specifically impacted by the reason for the market sell-off. In this case, you will be receiving income via the dividend. This will reward you while you wait for the market to realise that the firm is ok.

Secondly, as a longer-term investor, holding on to a stock during a market tumble may mean you are facing an as-yet-unrealised loss on the amount you invested. Yet if you are picking up income from a stock via the dividend, this can help to offset any loss on the money you invested. This can work particularly well should the market downturn last for a long time. Remember, if you sell up now, that paper loss becomes a real one.

And thirdly, on a historic basis, the businesses that tend to pay higher dividends are more mature firms that have been around for a long time and are seen as safer investments overall. Examples of this are British American Tobacco and GlaxoSmithKline. Such companies are unlikely to generate large returns for investors from a rocketing share price, so need to reward those buying the share by paying a high dividend. I appreciate that a high dividend does not always translate to a high dividend yield, percentage-wise. But there are plenty of solid shares out there that do.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jonathan Smith and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »