When most people think of investing in dividends, they think of the old blue-haired ladies who bought shares in GE, GM or 3M at the time these companies were better known as General Electric, General Motors and Minnesota Mining and Manufacturing.
This is a conservative approach to investment and wealth creation that has been largely forgotten over the last 20 years, as the dotcom bubble, the dotcom 2.0 and the internet bubble have prompted investors to think they might get rich quickly.
Now that stock markets are starting to show signs of weakness and booming technology stocks are deteriorating, more and more people are considering investing in dividends as a way to create wealth. But how good is it?
What are the dividends?
Dividends are money paid to shareholders of a corporation on the profits of the company. Everyone today associates the growth of equity investments with rising stock prices, the payment of dividends can also play a role in wealth creation. Companies typically retain the bulk of their profits in the form of retained earnings, which allows them to continue to grow.
Older and more established companies are convinced that they do not need to keep 100% of these profits and therefore reward their shareholders by paying dividends. The amount of the dividend is normally announced in advance and the ratio between the payment of the dividend and the share price of the company is called the dividend yield.
Since dividend paying companies are normally larger, older and more established, their share price is not expected to be subject to large fluctuations, which is why dividend investment has often been qualified. of "conservative". This was a traditional approach taken by older retirees who were dividing their shares so they would not have to touch their capital.
Issues related to dividend investing
One of the problems of investing in dividends is that companies can decide at any time to reduce their dividend payments or stop them altogether. This leaves those who depend on dividends to earn income in a difficult situation. And this happened often during the financial crisis of 2008 and its consequences.
There is a group of actions known as "Dividend Aristocrats,"Companies that pay ever larger dividends every year for at least 25 years. However, there are only about 50 of them, against about 6,000 shares traded on the NYSE and Nasdaq. And since dividend aristocrats are so well known, investing in them is a strategy shared by many other investors, which means it can be difficult to stand out.
Benefits of dividend investing
One of the benefits of investing in dividends is that in addition to the stock price appreciation, you receive a dividend. So, if the share price you own only appreciates 5% per annum but you receive a 2% dividend, you have outperformed that of someone whose shares in another company increase by 6%. % per year. Dividend stocks also tend to perform better than global equity indices during a recession, with the S & P Dividend Artistocrats Index losing less money than the overall S & P 500 Index in 2008.
If you have the chance to invest in a good dividend, you will still receive dividends, even when the stock price is down. And every time you receive dividends, you can choose to use them as income or reinvest them in the company's shares to further develop your portfolio.
Is there another way?
In the end, however, dividend stocks are always equities, subject to the same highs and lows as any other stock on the market. This makes it a risky investment for those seeking to maintain their wealth despite financial turmoil and economic uncertainty. Although the best-performing dividend stocks may lose less than all stock markets, they still continue to lose. And dividends are not guaranteed.
Compare that with gold, which gained 25% while stock markets lost 50% during the financial crisis. This is the type of asset you want to diversify into a bear market, something that is gaining value while everything else is losing value. So, if you think that moving from FANG shares to dividend stocks will be enough to protect you against significant losses in the event of a stock market crash, you will discover how wrong you are.
It is essential to properly diversify your portfolio with countercyclical assets such as gold to maintain as much wealth as possible during a bear market. The more money you earn (and earn) during a bear market, the better you will be in the future once markets have crossed the line. And with the ease of investing in gold through a gold IRAYou can even turn your existing retirement assets into gold quickly, easily and tax-free. If you are worried about the security of your wallet, use gold to protect it where other assets can not.
Trevor Gerszt is the IRA American specialist in Gold IRA, CEO of Goldco Precious Metals, and sits on the Board of Directors of Better Business Bureau Los Angeles.
© 2019 Newsmax Finance. All rights reserved.