The prospects for dividend stocks appear to be highly uncertain in the near term due to the expected economic slowdown caused by coronavirus. As such, many investors may currently be avoiding the purchase of dividend stocks to evade potential short-term paper losses.
However, now could prove to be a favourable buying opportunity for long-term investors. Many dividend stocks offer wide margins of safety due to weak investor sentiment. Meanwhile, the recovery potential of the economy could produce impressive returns for the stock market in the coming years.
As is often the case during periods of economic uncertainty, investor sentiment has been relatively weak in recent months. This has prompted a severe decline in the valuations of dividend stocks across the market. In turn, that has seen many investors seek to sell their holdings to try and avoid further paper losses.
This may not seem to be the right time to invest. But it could be an ideal opportunity to buy dividend stocks when they are trading at low prices. In many cases, companies now trade on yields and valuations that were last seen during the global financial crisis. This suggests they offer wide margins of safety that could lead to strong returns in the long run.
Most investors would rather buy a dividend stock when it has a low price, rather than a high price. However, for it to trade at a low price level, economic uncertainty is usually required.
This can cause a high degree of volatility in the short run. But it could also enable you to obtain high-quality stocks while they trade at exceptionally low prices. Over the long run, this could enhance your overall returns.
Cyclicality in dividend stocks
At the present time, the prospects for the world economy are relatively downbeat due to the impact of coronavirus. A recovery may seem unlikely. But history shows the economy’s performance is cyclical.
As such, current economic difficulties may last for many months, but the world economy’s track record shows it’s likely to recover. Previous global slowdowns, such as the financial crisis, felt as though they would last for a lengthy period of time while they were occurring.
Although, in some cases, they caused significant pain for many dividend stocks, global GDP growth has always picked up in the years following economic slowdowns to eventually return to relatively high levels.
Investors who can capitalise on the cyclicality of the world economy through buying during downturns could generate relatively high returns in the long run. Their portfolios are likely to experience paper losses in the short run, since finding the bottom of the stock market’s decline is exceptionally difficult.
But through buying a diverse range of high-quality dividend stocks, and holding them for the long term, you could produce high returns that boost 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.