A bear market demands that investors travel down the risk curve from higher risk, high growth stocks towards value-based dividend stocks. Investing in top dividend stocks creates several potential benefits that can help you weather a bear market, including:
Reinvesting Dividends Grows Your Stock Ownership
When a company pays out dividends, you can choose to take the money as a cash payment or reinvest it to buy more shares. For example, Triton International Ltd (TRTN) recently paid out $0.65 per share. If you had 100 shares of the company, you could take a $65 cash payout, or you could reinvest the dividend to buy an additional share, which cost about $65 at the time.
At the end of the next quarter, you would get a dividend payment for 101 shares instead of 100. If you keep reinvesting your quarterly dividends, you will see your share ownership grow commensurately.
You Buy Shares Without Spending Money
It’s critical to recognize that reinvesting dividends makes it possible for you to continue buying shares without spending any money during a bear market.
Dividends Can Grow With Inflation
Higher inflation – above 8.5% according to Pew Research Center – has many investors feeling nervous about the future. Adding dividend stocks to your investment portfolio helps buffer you from the negative effects of inflation. You might even benefit from higher prices.
As inflation forces consumers to pay more money for the items they need, established businesses often see their revenues and earnings grow, leading to higher dividend payouts.
Of course, not all businesses benefit from inflation. Smaller, newer businesses in particular will likely struggle as they try to compete with larger companies that dominate their industries. In most cases, it makes sense to choose companies that have exceptional brand recognition and enough capital to keep their prices reasonable during an inflationary period.
What Dividend Percentage Should Investors Expect?
Some companies offer incredibly high dividend yields. Those high percentages might look appealing to inexperienced investors. After all, why wouldn’t you want to choose an investment that pays you a larger dividend?
Companies with very high dividend yields often have fundamental problems lurking under the surface. The high payouts sometimes indicate that the company plans to buy back more of its shares, which can boost short-term earnings but often has long-term consequences that damage profitability.
Savvy investors usually look for sustainable returns of around 4%. Once a company goes over 5%, it warrants closer scrutiny. You don’t want to sacrifice long-term growth for short-term success, especially during a bear market that threatens the viability of unstable businesses.
Beware of companies that promise 10% or more. While some of them can follow through, many will fall short of their goals.
How To Use Dividend Stocks in a Bear Market
How you use dividend stocks in a bear market depends on factors like how much money you have to invest and whether you plan to retire soon.
If you have plenty of cash and a reliable source of income, a bear market makes it easier for you to buy dividend stocks at discounted prices. As stock prices fall, you can use your dividend payments to purchase more shares. Lower prices also make it possible for you to buy more shares with money you have set aside for investing. If history is a guide, eventually the market will recover, and your shares’ values will increase.
If you’re getting close to retirement or you worry that inflation will make it difficult for you to afford your lifestyle, you may wish to limit the amount of money you invest. As long as you have dividend stocks in your portfolio, you will benefit from them even when you don’t have much money to invest. Just reinvest your dividend payouts so you can buy more shares without spending cash. The more shares you own, the more returns they will generate over upcoming years.
Dividend Stocks to Consider in the Current Bear Market
- Philip Morris International Inc (PM) – 5.06%
- Universal Corp (UVV) – 5.22%
- Sturm Ruger & Co Inc. (RGR) – 5.23%
- Canadian Imperial Bank of Commerce (CM) – 5.31%
- TC Energy Corp (TRP) – 5.39%
- The Bank of Nova Scotia (BNS) – 5.4%
- Triton International Ltd (TRTN) – 4.94%
- Best Buy Co Inc (BBY) – 5.4%
- LyondellBasell Industries NV (LYB) – 5.44%
- Lamar Advertising Co (LAMR) – 5.46%
- BCE Inc. (BCE) – 5.78%