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Why smart investors are buying cheap dividend stocks right now

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Buying dividend stocks after a market crash could prove to be a worthwhile move over the long run. At the present time, a number of dividend stocks offer high yields compared to their historic levels. In an era when the returns of other assets could fail to keep up with inflation due to low interest rates, income stocks may prove to be a highly profitable asset.

Furthermore, the economic recovery that’s likely to take place over the coming years could produce strong dividend growth across a wide range of sectors. This could further enhance the return prospects for income stocks.

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High yields

Some companies have decided to postpone or cancel their dividend payouts in response to challenging trading conditions caused by coronavirus. But some businesses are set to maintain their shareholder payouts in the near term. In many cases, their stock prices have fallen over recent weeks. As such, their dividend yields could be much higher than they have been in recent years.

Their yields may also be significantly greater than the income returns available on other assets. Coronavirus has prompted a major monetary policy response across the world that could continue over the coming years.

As part of this, interest rates are likely to remain at relatively low levels in the medium term. This could mean the returns available on cash savings accounts and on bonds are highly unappealing. In many cases, they may even fail to beat inflation. This could lead to a reduction in your spending power in the long run. Therefore, on a relative basis, income stocks could prove to be highly attractive over a sustained time period.

Dividend growth

At present, dividend growth may seem to be unlikely. Coronavirus has caused many industries to experience hugely challenging periods that, in some cases, have never been seen previously. As such, many companies may be unable to pay higher dividends in the near term – or even over the medium term.

However, the track record of the world economy shows it has always managed to recover from its very worst recessions and even depressions. This means a similar recovery is likely this time around – especially with fiscal and monetary policy set to become increasingly accommodative in the coming years.

As such, buying income stocks that have the potential to grow their dividends could be a sound move. Investors may benefit from their high initial yield, and their capacity to produce above-inflation increases in shareholder payouts.

Increasing popularity

Dividend stocks could become increasingly popular among investors in the long run. They may attract a larger number of investors who are seeking a generous income return. This could lead to capital growth due to increased demand for dividend stocks, which may boost your total returns and improve your financial future.

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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.

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