Photo: Flickr Millicent_Bystander
The roller-coaster stock market of the past two decades is convincing many investors that buy and hold strategies no longer make sense.Even Motley Fool is beginning to question the wisdom of this strategy, which was the cornerstone of the investment advice company’s enterprise.
So, is it still Foolish (in the Motely sense) to continue buy and hold, or is it time to jump on the dividend investing bandwagon?
A Word of Caution
First, don’t follow investing trends like fashion trends. Take time to review the market strategy, understand the underlying reasons for the trend and then make a decision. Whether you decide to buck the trend of jump on for the ride can make or break your retirement portfolio.
Why Buy and Hold Is Taking a Beating
Buy and hold was a comforting strategy. All you had to do was buy low and wait. Selling high would eventually come when you were ready to retire. In a bull market, buy and hold works like a charm. Even when occasional bears raise their heads, so long as the bull market keeps charging, stock prices generally continue to increase.
That’s why buy and hold was so successful in the 80s and 90s. But when the joyride was over, millions found themselves holding tanking portfolios. Those close to retirement were hit the hardest.
Today, the market is neither bull nor bear. We’re in uncharted territory with a volatile market comprised of 15% technology stocks.
In addition, blue chip stocks aren’t the white knights they once were. It’s hard to find companies that will continue to gain in stock price over a lifetime. Once you figure the last few years of stock performance, the return on holding a 10 or 20-year stock becomes abysmal compared to the 11% return once touted as the benchmark to beat.
With stock market volatility, low bond yields, and stagnant money markets, some see dividend investments as the only practical source of steady growth for their portfolios. Thus, a market trend is born, plodding blindly along, just as the Buy and Holders did back in the day. Don’t be left holding the bag because you followed the investment gurus without doing your own maths.
Missing Out on Potential Profits
Buy and Holders paid little attention to dividend yields. They were all about buying low and selling high. Any money earned along the way through dividends was just a bonus. However, when you invest in a stock that pays no dividend because you believe its share price will increase and eventually yield a profit, you set yourself up for mayhem in a volatile market.
Today’s financial experts recommend holding for no longer than five years. Dividend Investing will become much more popular over the next few years as government debt hampers the growth of GDP in many developed countries…including the U.S.
Remaining flexible in the market helps minimize losses and potentially gain more revenue from your holdings. Selling off your dividend stocks after five years just because the strategy says so only leads to more market instability. It may also lead to a loss if the stock price doesn’t appreciate.
That isn’t to say dividend investing is the wrong strategy. It’s perfect for today’s market when applied appropriately. In fact, the abysmal returns of the last few years have brought down buy and hold earnings so much that Dividend Investing is yielding better returns.
Over the last 100 years, dividends have provided as much as 90% of overall stock returns. Dividends have steadily paid out larger sums than other investment tools, such as bonds or money markets, without as much risk as traditional stock trading investments.
So, How Do You Find Good Dividend Investments?
One popular strategy for locating high-paying dividend stocks is called FINVIZ. The technique is a stock screener that helps you pick out the best long-term investments.
While FINVIZ is for patient investors, that doesn’t mean you should just buy these stocks and keep them. Investors need to monitor performance and evaluate the value of holding these stocks regularly. FINVIZ screening consists of the following elements:
Dividend Yield: 4% or better annually
Market Cap: Above $2 million
Return on Equity: Over 10%
Debt to Equity Ratio: 0.5
Institutional Ownership: 40% or more
200-day Moving Average: Trending Up
While stock screeners are available at investment sites online, the best strategy is to do your own homework. If your screen turns up some obvious dogs, use your head and avoid them.
10 Potential Dividend Investment Stocks
The following 10 companies may be good targets for new dividend investors. Investigate these companies and decide if you think they are worth the investment:
Procter & Gamble (PG)
Johnson & Johnson (JNJ)
Lockheed Martin (LMT)
Bristol-Meyers Squibb (BMY)
Genuine Parts (GPC)
Microchip Technology (MCHP)
Dividends That Are Less Exciting but More Reliable
The best potential for higher earnings over the next 10 years will probably come from dividend payments at well-established companies. Some may consider these companies less trendy than they would like, but dividend-yielding companies continue to see steady earnings during this volatile economic time. The dividends paid out from the steady earnings could keep many portfolios in the black while the stock market continues to ride the roller coaster of technology, housing, and other market changes.
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