While the prospect of capital gains gets most investors excited and is a key reason for investing in the first place, dividends can make a huge difference to an investment portfolio and to an investor’s life. Here are three reasons why companies that offer impressive yields and upbeat dividend prospects may be the most valuable shares available right now.
Income return
Although capital gains may make an investor feel better and a higher net worth may give an individual a spring in his or her step, day-to-day costs are generally paid with income. Without a decent income, it’s not possible to pay the bills, go on holiday or spend money on luxury items without eating away at savings.
Stocks that pay a relatively high yield therefore enable an individual to not only grow their wealth, but to exist and enjoy life outside of the investment world. And with investing usually being a means of either improving an individual’s lifestyle, retiring comfortably or funding opportunities for family members, high-yield stocks appear to accomplish these goals in a fairly straightforward manner through a high income return.
Inflation-beating growth
Although inflation is currently near zero, this situation won’t last. Certainly, deflation may be a bigger threat than inflation at the present time, but in the long run much higher rates of inflation will inevitably return. Therefore, the spending power of an individual could easily be reduced if income doesn’t move higher at a pace that at least matches inflation. This situation would lead to cost-cutting on the part of the individual, which is never a pleasant experience.
Although not all high-yield stocks offer dividend growth prospects that are set to beat inflation, there are many that do. Buying them could therefore lead to not only a high income return, but one that rises by as much (or more) than inflation, which could sustain or even improve an individual’s lifestyle over the medium-to-long term.
Increasing popularity
With interest rates being low and expected to stay low over the medium-to-long term, dividend stocks are likely to become increasingly in vogue among yield-hungry investors. That’s especially the case since the yields on other assets such as bonds and property are now rather unattractive. As such, the share prices of dividend stocks could increase as higher demand from investors bids them up.
In addition, with there being a considerable amount of uncertainty and volatility present in the stock market, dividend stocks could be seen as safer companies to own. That’s because paying a generous dividend may be seen as a statement of confidence in the company’s future, while the cash flow from dividends received during a downturn can be used to buy high quality stocks when they’re trading at a discount to their intrinsic value. Therefore, as well as offering capital gain potential, dividend stocks could also offer less downside risk than many of their index peers.