The stock market can be summed up in many ways, but few words seem more meaningful at the moment than "volatile." There are many ups and downs, and in a market defined by uncertainty, the only thing that appears certain is the continuation of that volatility.
Still, investing doesn't have to be stressful. In fact, it can be just the opposite. Investors who want more peace of mind can sleep better at night by including dividend stocks in their portfolios.
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Keep your eyes on the long-term prize
A major problem with the volatility in the stock market is that it makes it easy for investors to get distracted. If you're investing for the long term (which you should be), your focus should be just that: the long term. Daily, weekly, monthly, or even yearly price movements shouldn't matter too much as long as the long-term results are there.
Dividend stocks make it much easier to ignore the short-term noise and focus on the long term because you're getting paid regardless of price movements. Let's take Altria Group (NYSE: MO), for example, which investors largely flock to because of its dividend. Since the beginning of 2020, the stock is down about 10%, yet investors have made $10.60 per share they own over that span.
Data source: YCharts
Paying a dividend doesn't automatically make a stock a better value than a non-dividend-paying stock, but it definitely helps investors stomach short-term volatility. With growth stocks, you need the stock price to increase to make money. Of course, you'd want your dividend stocks' price to increase as well, but appreciation isn't the only factor your returns rely on when you invest in these kinds of stocks.
Bear markets can be a blessing in disguise
Bear markets occur when major stock market indexes (such as the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average) fall at least 20% from recent highs. It's what largely defined the stock market in 2022, with stock prices dropping across the board. However, bear markets aren't all bad for dividend investors.
Nobody likes seeing their portfolio drop, but there are opportunities to be found in the gloom, especially when it comes to dividend yields.
An annual dividend is measured in relation to a company's share price, which is expressed in percentage terms as the dividend yield. Because of this relationship, a change in a stock's price affects the dividend yield inversely -- when a company's stock price rises, its dividend yield decreases, and vice versa. For instance, if a company's yearly dividend is $1 per share and its stock price is $50, its yield would be 2%. If the stock price increased to $100, the yield would be 1%, but if the stock dropped to $25, the yield would be 4%.
In less volatile stock markets, you'd want to err on the skeptical side and investigate the why behind a stock's large drop. But during bear markets, when stock market prices, in general, are dropping, many businesses experience large share price declines through no fault of their own or their fundamental business. That's the time when you can get more bang for your buck.
Reinvesting your dividends can work wonders
Dividend payouts are great, but the real magic occurs when you reinvest your dividends. Most brokerages and many companies offer a dividend reinvestment program (sometimes called a DRIP), which allows you to automatically take the dividends you're paid and reinvest them into that company's stock. Over time, reinvested dividends can account for a large part of an investor's total return.
From 1960 to the end of 2022, 69% of the total return of the S&P 500 can be credited to reinvested dividends. A $10,000 investment would've been worth just over $641,000 based on price alone, but once you include reinvested dividends, it jumps to more than $4.05 million.
If you don't need the cash payouts for your livelihood, consider reinvesting your dividends and increasing your shareholdings until retirement. Once you hit retirement, having that extra stock can pay off and provide considerably more income for you.
