(Maurie Backman)
It’s been a really tough ride for investors these past few weeks. Stock values have been plunging since the second part of April, and that’s on top of the losses investors were already seeing in their portfolios due to earlier-in-the-year volatility.
At this point, it would be premature to say we’re in the midst of a stock market crash. But it’s definitely fair to say that we’ve plunged into a down market. And that can be unsettling, whether you’re a new investor or have maintained a portfolio of stocks for years.
If you’re worried about a full-blown market crash, there’s one type of stock it could pay to load up on — or hang on to.
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The benefit of dividend stocks
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It’s estimated that more than 400 companies within the S&P 500 index pay dividends to investors. If you want to hedge your bets during periods of volatility, dividend stocks are a good way to go.
Companies that pay dividends tend to do so on a quarterly basis. That means that even during periods of general stock market sluggishness, you can look forward to those predictable payments.
Here’s another way to put it: Companies that pay dividends tend to do so even during periods when their share price drops. That gives you options as an investor. You can take your dividend payments and use them as cash if you have a need for money. That could, in turn, make it possible to leave your portfolio alone and avoid liquidating investments at a loss when they’re down.
If you don’t have a pressing need for cash, it’s a good idea to reinvest your dividends. And that could help increase your portfolio’s total return or minimize the hit it takes when market conditions aren’t so favorable.
How to choose the right dividend stocks
If your goal is to secure a steady stream of dividend income, consistency is key. As such, you’ll want to look at companies that have steadily paid (or better yet, increased) their dividends through the years.
One thing you don’t necessarily want to do is chase the highest dividends out there. Higher dividends don’t necessarily imply that a given company is doing better financially than its competitors or that it has more growth potential. In fact, it’s easy to argue that companies with higher dividends may be limiting their growth by not reinvesting enough in their respective businesses.
For the most part, however, companies with solid histories of paying dividends are established businesses with strong financials behind them. And if you’re looking for a way to get through a stock market crash — whether in the near term or the long term — then it pays to consider loading your portfolio with dividend-paying stocks.
Another option worth looking at if you’re focused on dividends is REITs, or real estate investment trusts. REITs are required to pay 90% of their taxable income as dividends to shareholders. If your portfolio is currently devoid of real estate stocks, you’ll get the added benefit of diversification. That, too, could be instrumental in getting through a stock market crash.
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