Volatility is back -- with a vengeance. Even scarier, fear of an economic slowdown has knocked the bottom out of the market. As a result, much of that volatility feels as if it's the result of stocks all moving in the same direction -- down.
That rapid, downward movement makes it difficult for investors to fulfill the second half of the old investing saw "buy low, sell high." If you're not selling high, you're not freeing up cash to invest in the bargains that are becoming available in this generally falling market. Of course, if you happen to have piles of spare cash lying around, you could use that money to buy into this market -- but who has that kind of liquidity?
Your always-active cash machine
That's the obvious reason why dividend-paying stocks are so powerful in a down market. Those dividends get paid regardless of what direction stocks move. Their routine cash infusions give you the ready source of capital you need to take advantage of today's discounted stock prices.
Less known, but equally as important, is that dividends themselves can give you a tremendous rate of return, with no stock gains required. So even if the market stays nasty for years, you can still get a decent return on your investment, thanks to the power of strong dividends. Sure -- there's the little bit of cash you get today from those payments. The true power and returns from dividends, though, come from their tendencies to rise over time as the companies behind those dividends grow and prosper. For instance, check out the long-term dividend profile of these powerhouses:
|
Company |
Current |
Year-Over-Year |
Consecutive |
|---|---|---|---|
|
Bank of America |
6.0% |
14.3% |
30 |
|
General Electric |
3.6% |
10.7% |
32 |
|
SYSCO |
2.9% |
15.8% |
37 |
|
Federal Realty Investment Trust |
3.4% |
6.1% |
40 |
|
Pfizer |
5.7% |
10.3% |
40 |
|
Cincinnati Financial |
4.1% |
6.0% |
48 |
|
Diebold |
4.0% |
9.3% |
55 |
The power of the payout
Let's look at General Electric in greater detail. Thirty-two years ago, at roughly the time it started raising its dividend, you could have bought GE shares for a split-adjusted $1.09 a share. These days, the industrial titan pays out $1.24 per share per year in dividends alone! Your yearly dividends today would be higher than your adjusted cost basis from your original purchase.
That's the phenomenal power that comes from dividends. In down markets, you can reinvest those dividends and accumulate more shares at cheaper prices. Or you can switch to an income strategy and take the cold, hard cash.
That's why, in markets like today's, investing in top-flight stocks with strong dividend histories -- and the real potential to keep those payments flowing -- is a sound strategy for making it through to brighter days. You can rest assured that even as the market flips, flops, and falls, your cash will keep rolling in.
At Motley Fool Income Investor, we've taken that lesson to heart. If you need a few ideas, you can view our two latest recommendations and our team's top five dividend stocks for new money with a 30-day free trial. There's no obligation to subscribe.
At the time of publication, Fool contributor Chuck Saletta owned shares of Bank of America, General Electric, and SYSCO. Bank of America, SYSCO, and Pfizer are Income Investor picks. Pfizer and Diebold are Motley Fool Inside Value selections. The Fool has a disclosure policy.
