Time for dividend-paying stocks?

These are challenging times to invest for income. Historically low interest rates have been holding down bond yields. Even if rates stay low for a significant amount of time, they are likely to rise at some point in the future. If that happens, it would depress prices on all bonds, especially many long-duration fixed-income securities. What’s more, expansionary monetary policy and large government debts heighten the risk of inflation, which is one of the biggest threats to any fixed income stream.

There are many income-producing alternatives to consider. Thanks to strong corporate balance sheets and low valuations, many dividend-yielding stocks now offer the potential for sustainable dividend payouts and the possibility of capital appreciation.

Their appeal isn’t limited to the current climate, however. Historically, stocks with healthy dividend yields have tended to offer the potential for strong long-term returns, with less volatility than the market as a whole. Prior to about 1960, the lion’s share of returns in the equity markets came from dividends.

Dividend investing has been overlooked somewhat in recent decades, as investors focused instead on stocks’ potential for price gains. But for many years, dividends were the primary reason to invest in the stock market. Dividend-paying stocks are the decathletes of the equity market. They don’t usually come in first in any one event. But as an asset class they have tended to be consistent—and that consistency can help them win over the long term.

Historically, shares with strong dividend payouts also have been considerably less volatile than the market as a whole—typically lagging the broad market during rallies and holding up better during market declines.

To incorporate dividend-paying shares into your investment mix, consider shifting a portion of your existing equity and fixed-income allocations into a fund that generates income through equities. This may boost the income your portfolio generates, while providing diversification away from both your stock and bond allocations.

The role dividend-paying stocks play in your portfolio is up to you, based on your risk tolerance, time horizon, and other factors. But almost any long-term investor can benefit from them.

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