In 2022, dividend stocks have really come back into focus. This is illustrated by the fact that in the first half of the year, equity income funds and dividend-focused exchange-traded funds (ETFs) recorded very strong inflows.
So, why are investors piling into these stocks right now? What advantages do they offer over other stocks?
Dividend stocks have big appeal
In the current environment, there’s a lot to like about dividend stocks.
For starters, dividends represent an easy way to make money from the stock market. Right now, markets are very choppy. As a result, it’s quite hard to generate capital gains. In this kind of environment, dividend-paying shares have huge appeal. That’s because, with these stocks, investors can sit back and relax, knowing that no matter whether share prices rise or fall, they’re still collecting income.
Dividends also have appeal when inflation is high. In an inflationary environment, near-term returns are more valuable than returns in the future. That’s because future returns are likely to be eroded by inflation over time. The fact that dividend stocks offer returns in the short term (compared to growth stocks that may or may not provide returns in the long term) is therefore a big plus.
Passive income
Of course, dividend stocks also represent a straightforward way to generate passive income. Right now, everyone is looking for ways to make some extra money in order to handle the rising cost of living. Is there an easier way to do this than dividend investing?
By investing in dividend payers, one can generate extra income for doing absolutely nothing. And yields can be quite attractive. For example, in the FTSE 100, there are plenty of shares that offer yields of 5% and higher at the moment.
Portfolio protection
Finally, it’s worth noting that dividend stocks can also provide protection against stock market volatility. Companies that pay dividends tend to be well-established, profitable businesses. Often, the share prices of these kinds of companies fall less than the broader market during periods of stock market volatility. Unilever is a good example here. This year, its share price has been flat while the FTSE 100 has fallen around 6%.
It’s worth stressing that not every dividend stock is this stable. Plenty of more cyclical dividend payers (such as housebuilders and banks) have fallen this year. If you want stability from income stocks, you need to be selective.
I’ll be buying more dividend stocks for my portfolio
Given their advantages, I’m a fan of dividend stocks. I currently hold a number of them in my portfolio.
My focus is on dividend growth – I look for companies that have consistently increased their payouts over time as these types of companies tend to provide healthy total returns (capital gains and dividends) in the long run. Unilever, Diageo, Reckitt, and Sage are some companies I own.
Looking ahead, I plan to keep adding to my positions in these companies. I like the stability they bring to my portfolio, and the fact that they provide me with regular income no matter what the stock market is doing.