As we navigate the waters of Covid-19 with a splash of negative oil prices, the importance of quality in your portfolio is certainly at the forefront. It has become apparent over the past couple of months that market volatility is here to stay for a while. Furthermore, we have witnessed yet another reminder of the unpredictability of the market.
Enter dividend stocks. Nobody is happy to open a negative account statement. However, if your portfolio income was unaffected, would it make you feel a little bit more comfortable with the decrease in value? First and foremost, it is a vote of confidence in the financial position of the company. Many companies are struggling right now and have cut their dividends. If the companies you own are still paying their dividends, that should give you some assurance.
If you own a company that has cut their dividend, it doesn’t necessarily mean that you should panic. Take the time to read up on whether or not the cut was permanent and more importantly, how the cut fits into their plans to weather the storm. Whether you’re fearing a dividend cut, experiencing a dividend cut or still receiving dividends, it is definitely a good time to review the quality of the companies in your portfolio.
One great way to determine a company’s commitment to the dividend is to look at the dividend history. 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 increases the dividend every year, that means your yield on your original investment increases each year. Additionally, it enables your income to keep up with inflation.
The value of dividends is definitely highlighted in down markets. If you are living off of your dividends, then it is obviously very important to you to receive these payments. 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 during challenging times.
Now more than ever, take the time to determine the financial position of the companies you invest in and their commitment to the dividend. If you see a stock with a double-digit yield, that is a result of a large drop in the stock price. Proceed with caution and make sure you are comfortable with the possibility of a dividend cut. That leads me to close this out with a line you’ll read many times in my posts. If it sounds too good to be true, it probably is.