The recent stock market crash may have caused many investors to doubt the appeal of dividend stocks. After all, their prices declined significantly in a very short period of time. Looking ahead, further falls in the stock market wouldn’t be a major surprise due to the ongoing risks posed by coronavirus.
However, stocks could still be a better long-term investment than gold. They’ve low valuations, high yields and recovery potential. As such, buying a range of dividend stocks today and holding them for the long run could be a sound means of improving your chances of retiring early.
While dividend stock prices may have come under severe pressure in 2020, the popularity of gold has increased significantly. The precious metal has reached a seven-year high. What’s more, it could experience rising demand among investors should the prospects for the world economy continue to be uncertain over the coming months.
However, over the long term, gold may lack total return potential. Its high price could indicate there’s limited scope for capital growth compared to undervalued stocks. Furthermore, investor sentiment is likely to recover from the low levels experienced this year as the outlook for the world economy improves. This has taken place after every previous bear market. So that could mean the appeal of defensive assets such as gold decreases as investors become less risk averse.
Improving investor sentiment could lift dividend stock prices over the long run. This could help to improve your retirement prospects through producing a larger nest egg from which to generate a passive income in older age.
Of course, a sustained rally in stock prices may seem highly unlikely at present. But in every previous bear market there have been moments where the outlook for equities and the world economy have been exceptionally downbeat.
Yet the stock market has produced a recovery from every downturn it’s experienced. Investors who’ve purchased stocks while they’re undervalued during such periods have generally experienced strong returns in the bull markets that have always followed bear markets.
The appeal of dividend stocks
Dividend stocks could be highly attractive for investors who are aiming to build a retirement nest egg over the long run. Reinvesting dividends has historically accounted for a large portion of the stock market’s total returns. Therefore, companies that trade on high yields could appeal to growth investors and not just income-seeking investors.
Through purchasing companies that have generous dividend cover (which is calculated by dividing net profit by dividends paid), it’s possible to obtain a relatively robust passive income stream that can be reinvested over the coming years.
This strategy may lead to higher returns that ultimately help you to reach your goal of retiring early.
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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.