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During periods of low yields and market volatility most experts recommend dividend stocks and funds. This may sound a good advice and history supports this view; however, it is always important to be aware of alternative views as there is no such thing as a risk-free investment.
1) Dividends are a good income-producing alternative when money market yields are low.
Taking cash and buying dividend stocks isn't consistent with being a conservative investor, regardless of what money markets are yielding. Additionally, there is no evidence that money market yields signal the right time to invest in dividend-focused mutual funds. Many advisors also call dividends a good complement to other investments during times of high volatility and low bank yields.
2) Dividend companies may be more stable and better managed.
It is generally believed that companies that raise their dividends over a long period have solid market positions and strong cash flow. As a result, the stocks' total return is likely to outpace other stocks. It's also common to hear the argument that dividends tend to hold companies to a certain standard of financial discipline and that, as a result, these companies budget more carefully and avoid wasteful projects out of fear that shareholders will punish the stock if it fails to return profits to its investors.
3) Dividend stocks provide upside potential and downside protection.
Dividends provide very little – if any – downside protection during market corrections. Since 1926, dividends have provided about one-third of the total return for the S&P 500, while capital appreciation has provided the other two-thirds. Focusing on dividends, which provided less returns than capital appreciation, makes little sense, especially since the dividend focus is just as risky.
4) Dividend-focused investing is ideal for retirees and conservative investor
This statement is incredibly misleading. First, if you want an investment that protects against inflation, you can buy an inflation liked bond instead of taking equity risk. Secondly, all equity investments provide a measure of protection against inflation, not just dividend stocks.
No one ever said you could only have one investment. If you are a conservative investor, you can simply create a portfolio of bond funds and a little bit in a stock fund. The idea is to create an investment portfolio, not an investment collection. Each investment in the portfolio should work with the others to achieve a goal. This works much like the ingredients in a recipe, which come together to create a great dish.
Why are dividends a better way to generate income than capital gains? Simply put, capital gains are not a sure thing, but neither are dividends. And there is simply no way to know which stocks will continue to be "solid" in the future. A long-term view, diversification and common sense continue to be the best mitigants of risk.
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