The prospects for dividend stocks may prove to be somewhat challenging in the short run. After all, risks such as political uncertainty in the US and Europe, as well as the potential for a rise in coronavirus cases later this year, could provide difficult trading conditions for many businesses.
However, those risks mean that many companies now trade on low valuations that could lead to high returns in the long run. Buying them now instead of other popular assets could boost your financial position over the coming years.
Bargain dividend stocks
The low valuations of dividend stocks is a key part of their appeal at the present time. They appear to offer wide margins of safety in many cases that could translate into improving returns in the long run.
A strategy of buying high-quality companies while they offer wide margins of safety has been highly profitable for many investors in the past. Value investors, such as Warren Buffett, have been able to purchase stocks when risks are relatively high and their prices are reflective of weaker investor sentiment. Over time, the stock market has always recovered from the various risks it has faced to produce high single-digit returns over the long term.
Through buying a diverse range of dividend stocks today, you can access low valuations and high yields that could lead to attractive total returns as the world economy recovers.
Dividend stocks have been a popular means for income-seekers to generate a passive income since the global financial crisis. Lower interest rates have caused other income-producing assets, such as cash and bonds, to become a less viable means of producing a worthwhile passive income. Therefore, many investors have focused their capital on dividend shares when they would normally have also held cash and/or bonds in the past.
This situation is likely to be prolonged by the recent market crash. Policymakers across many large economies are set to remain supportive of the global economy’s growth prospects. Especially during what is proving to be a hugely damaging period following the pandemic.
Rising unemployment and weaker GDP growth may encourage sustained low interest rates. That would make dividend stocks one of the few means of generating an above-inflation income return over the coming years.
The past performance of equities suggests buying dividend stocks could increase your chances of generating market-beating returns. A large proportion of the stock market’s total returns have been derived from the reinvestment of dividends. This trend could persist in the coming years, as the continued payment of generous dividends may provide compounding opportunities for investors.
Therefore, even if you don’t desire a passive income today and are looking for capital growth over the coming years, buying a selection of dividend stocks could help you to achieve your financial goals.
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.