The recent stock market crash has caused many high-quality dividend stocks to trade on low valuations. In the short run, their prices could move lower, due to the economic impact of coronavirus. But over the long run, they’ve the potential to deliver a sound recovery.
Furthermore, with interest rates likely to remain at low levels as policymakers seek to support the economy during an uncertain time, the yields available from dividend stocks could make them highly attractive relative to other income-producing assets. This may catalyse their prices over the coming years.
Short-term risks
The world economy is likely to continue to face risks over the coming years that could negatively impact on its growth rate. For example, there could be a second wave of coronavirus in the latter part of 2020. There may also be ongoing geopolitical uncertainty between the US and China that could cause a deterioration in global economic activity.
Despite this, now could be an opportune moment to buy dividend stocks. In many cases, investors have factored in the dangers facing the world economy over the medium term. Therefore, long-term investors can take advantage of lower stock prices to obtain more attractive risk/reward opportunities.
Over time, investor sentiment and the world economy’s growth rate are likely to recover, which may produce rising dividends and improving stock price performances.
Recovery potential among dividend stocks
Even if there are difficulties ahead for many dividend stocks, equities have a solid track record of delivering long-term growth. For example, the FTSE 100 and S&P 500 have recorded annualised total returns in the high-single digits since their inceptions. Therefore, even if they experience slower growth for a period of time, improved performance is likely to be ahead.
With a large proportion of the two indexes’ returns having been derived from the reinvestment of dividends, purchasing a selection of income stocks could prove to be a sound investment for a wide range of investors. They may, for example, offer investment appeal for growth investors as well as those individuals who are seeking to generate a passive income from their portfolio.
Low interest rates
Furthermore, dividend stocks could become increasingly popular over the coming years. Low interest rates look set to remain in place over the next few years, as policymakers seek to revitalise the economic outlook. This could make the returns on dividend stocks seem far more appealing on a relative basis than other income-producing assets, such as cash and bonds. Therefore, demand for income stocks may increase, which could boost their prices.
As such, now could be the right time to buy a diverse range of dividend stocks and hold them for the long run. They may experience some near-term uncertainty, but have the potential to offer a strong total return as the stock market recovers.