Everybody's talking about dividend stocks these days, and for good reason. These companies pay you annually just for owning shares. That equals recurrent income for you -- no matter what the market does. In a difficult year like 2022, dividends might have buoyed your portfolio -- and your spirits.
Now, in the early days of 2023, you might be wondering if you should go all in on dividend stocks. If the market continues in the doldrums, this strategy could work to your advantage.
Or should you turn to higher-growth companies that don't pay a dividend? They may be the first to rebound in a market on the rise, after all. It's not an easy decision, but let's consider our options.
Scoop up Dividend Kings
Dividend stocks make a great addition to a portfolio at any time. Everyone loves recurrent income. And if you scoop up shares of a Dividend King like Coca-Cola or Procter & Gamble, for example, you can be pretty confident about dividend growth, too.
Dividend Kings have raised dividends for at least the past 50 years, so rewarding shareholders is important to them. It's likely they'll continue this policy.
As mentioned earlier, you'll particularly appreciate dividends during tough market times. Even if your portfolio's performance is down, dividend payments will limit the damage. In some cases, these companies -- considered safer in a difficult environment -- will outperform the general market. Coca-Cola is a good example of this, beating the bear market last year.
In other cases, the dividend stock may decline along with the rest of the market. But since the stock pays you a dividend, your loss on the investment is less than it would have been if the stock didn't pay a dividend.
Target is an example. The stock fell 35% last year. But Target paid shareholders a total of $3.96 per share over four payment dates. If you owned 100 Target shares, that came out to $396. And if you own a few different dividend stocks, these payments can quickly add up.
Higher-growth stocks -- such as Amazon or Etsy -- don't pay dividends. They focus on investing into growing their businesses.
Right this minute, owning these stocks isn't paying off for investors. These two each sank more than 45% last year. But better market times favor growth stocks. So as the market starts to recover, these players could be among the first to take off.
Short term versus long term
Now let's get back to our question: Should you go all in on dividend stocks this year? If we were to look at the short term only, we could say go all in on dividend stocks if you expect more market declines -- but go for growth stocks if you think we're heading for a bull market.
Here's why that's not a good idea. It's impossible to know exactly what the market will do in the short term. If you make the wrong decision -- and heavily invest in just one type of stock -- you could lose out in a big way.
Instead, it's best to focus on the long term. And through this lens, both dividend and growth stocks make great additions to your portfolio. You should favor particular players or themes, according to your tolerance for risk.
For example, if you're a cautious investor, favor dividend stocks and companies in industries with steady earnings -- such as healthcare. If you're aggressive, you may want to go for more growth stocks -- whether the market recovery comes this year or later.
And here's the best news of all: The market will recover. History shows us bear markets have always led to bull markets. So right now in 2023, invest for the long term, look for opportunities to buy great companies at good prices, and make sure dividend stocks are part of this winning, long-term mix.
