Stock markets are rising steadily. This looks like a great time to buy growth stocks that can give me some solid returns over time. But I think this is also a good time to think of buying dividend stocks. Here are three reasons why.
#1. Dividends are rising
As companies recover from the pandemic, dividends are rising. I reckon they will continue to rise as the economy gathers pace. So far it may not appear to have done hat. After all, the UK economy grew by just 2.3% at the last update. But that was also for a period when we were partly under lockdown.
Now however, we are in the final stretch of the lockdown with most restrictions already lifted. Many sectors of the economy are functional. So it should start showing up in the numbers. Indeed it already is. From oil biggies to banks, companies have shown a sharp improvement in performance. I think it is only a matter of time before dividends rise further. I would buy high-income potential shares now to get the best bang for my buck.
#2. Inflation is rising too
I squirm at the idea of my idle cash lying in no- or low-interest-paying bank accounts. Especially when inflation is rising. This is a guaranteed way of eroding the value of my money. If prices rise faster than my cash piles up, then I am able to afford less over time.
Instead, I would be better off buying stocks of reliable companies even if they have a relatively low dividend yield of say, 3%. The latest inflation reading is at 2.1%, so anything that covers the increase is good for me. There are plenty of FTSE 100 stocks alone that offer me a choice of 3%+ dividends.
#3. Supplementary income
Who does not like a steady stream of extra cash in their bank account regularly? I certainly do. So I am steadily building up my income stocks, even if the capital gains on them are slow. Typically I focus on the biggest companies in the stock markets that have a long history of paying dividends. But I am careful if their share prices are falling. If they fall less than the dividends earned, I am still a net gainer. Otherwise not.
What I’d be careful about
There is one note of caution when buying income stocks, however. Dividends are dependent on companies’ health. This can change according to a company’s own circumstances, developments in its sector or, as we saw last year, during an economic slowdown. From time to time, I can expect my dividends to be impacted, because we function in market economies that see regular upswings and downswings. To that extent, I like to review my income stocks at regular intervals to ensure that I receive the best returns.