As we navigate the choppy waters of the 2022 market cycle, the importance of owning quality companies in your portfolio is certainly at the forefront. With the fourth quarter on the horizon, all the calls for the market to turn around have been met with more volatility and the likelihood of a down year continues to grow. Investors are exhausted and pessimism is rising. This is just another reminder that markets don’t go up in a straight line and the short-term path is very unpredictable.
In times like these, it helps to know what you own and why you own it. Enter dividend stocks. Nobody is happy to open a negative account statement. However, if your portfolio income is unaffected and you are invested in high quality companies, would it make you feel a little bit more comfortable with the decrease in value? First and foremost, dividends are a vote of confidence in the financial position of the company. When panic sets in, many investors begin to worry about losing everything. A stable company with a strong balance sheet and the ability to pay dividends to shareholders should be able to weather any potential storms on the horizon.
If a company has a record of paying dividends and better yet, raising the dividend, that is certainly a positive indicator. Many companies pride themselves in the dividends they pay and are a great source of income for investors. If you own a company that raises the dividend every year, that increases the yield on your original investment each year. Additionally, it enables your income to keep up with inflation.
The value of dividends is certainly highlighted in down markets. If you are living off your dividends, your dividend payments may very well be more critical to you than the fair market value of your portfolio in a downturn. If you don’t have any intent to sell your stocks, then you can ride out the cycle and continue to receive your income. Even if you are reinvesting your dividends, you are buying more shares at lower prices with your dividend income.
Whether you are accumulating cash or more shares from your dividends, they certainly offer a significant advantage while you wait for your portfolio value to come back. They aren’t a magic bullet, but they provide some comfort when you put things into perspective. They are also a reminder of the importance of making a plan tailored to your individual situation.