It's been a pretty brutal year for stocks. The S&P 500 index has been hovering around bear market territory for weeks and even crossed that threshold briefly last week. And other major indexes are also down in a very big way.
For the most part, I'm really not sweating this recent bout of turbulence. The reason? I'm not planning to retire any time soon, and that's what my portfolio is earmarked for. And so I know that as long as I leave my portfolio alone, I won't lock in any losses, thereby allowing my investments to recover.
But even though I'm not planning to tap my portfolio in the coming months, the reality is that you never know when a need for money might arise, and when selling stocks will become your only option. Granted, I've done my best to protect myself from that possibility by loading up on plenty of cash in my emergency fund. But again, you never know.
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That's why I'm grateful for the fact that my portfolio is loaded with stocks that pay dividends. While my current plan is to reinvest that money, the idea of getting steady payments in my portfolio certainly lends to more peace of mind.
A solid investment to hold in volatile times
The great thing about dividend stocks is that they offer investors dual opportunities to make money. First, like all stocks, shares of dividend stocks could gain value over time. That makes them a great long-term investment.
Secondly, companies with a long history of paying dividends tend to uphold that practice even during periods when stocks are slumping. And so dividend stocks are great to have on a short-term or immediate basis, because if a need for money does arise, you can cash out those dividends and use them as you please rather than reinvest them.
Now to be clear, I would never make a plan to cash out my dividends before tapping my savings account. But it's still a nice option to have.
How to choose the right dividend stocks
I always like to caution people to not get too hung up on dividends alone, because a higher dividend yield isn't necessarily what makes a company a solid buy. What I prefer to do is focus on companies with solid business models that also have a long history of paying and increasing their dividends.
I also tend to favor REITs, or real estate investment trusts, because they commonly pay higher-than-average dividends. (That's largely because they're actually required to pay 90% of their taxable income as dividends.)
But I won't just randomly throw REIT shares into my portfolio. Instead, I tend to focus on companies in industries that are poised to thrive not just in the near term, but in the long term.
Another good thing about REITs -- at least for me -- is that they lend to more diversity in my portfolio. And that's an important thing to have during periods when stocks are underperforming.
All told, I hope to be in a position where I don't have to touch my portfolio for many years. But having dividend-paying companies in there definitely gives me some reassurance at a time when stock values seem to be in an extended slump with no immediate light at the end of a very dark tunnel.
