By Lee Sherman
There’s nothing the stock market fears more than uncertainty and the coronavirus pandemic has sent the market spinning out of control as governments scramble to understand and enact measures to contain it and avoid a recession or even a depression. The US response has been inconsistent, to say the least, and no one really knows what will happen next or how long this will last.
Dealing with a crisis
We’ve said before that it’s a good idea to retain a diversified portfolio with a mix of asset classes including dividend stocks, mutual funds, ETFs, real estate and high quality (not junk) bonds but while a passive income strategy still makes sense if you are in a position to ride out a crisis, not everyone is in a position to do this. If you’re retired, for example, and need income today (to pay rent, living expenses, and bills for example) you’ll need a portfolio that is more liquid in nature. Before you panic and sell off assets that may yet recover their value, think about doing the opposite and investing in dividend stocks.
Like it sounds, dividend stocks are companies that pay out regular dividends. Financial advisors don’t recommend second-guessing the market. Rather than invest in Kimberly-Clark (Scott) or Johnson & Johnson (Purell) just because there’s a run on toilet paper or hand sanitizer, you’re better off looking toward well-established so-called “blue-chip” companies that have a track record of regularly paying off dividends to shareholders. Dividend stocks are generally a good bet but like any investment, they are not without their downsides.
If you’re looking for long-term growth, they may not be for you because they typically see less price appreciation, share prices can still drop, and you are at the mercy of the company issuing the stock, which can cut or even eliminate rates at any time and for any reason. Unlike with other asset classes, there is little to no regulation protecting their value.
As with any investment, you should really do your homework first. Among the things to consider; the size and time the business has been in operation, the industry sector they operate in, and the experience of the founders and executives who run it. Key metrics to know are the share price, dividend per share, the net profit, and cash flow. Don’t be afraid to compare one company against another to find the one that ticks all of your boxes.
Dividend stocks are usually well-established companies with a track record of distributing earnings back to shareholders. If you have stocks in your portfolio that regularly pay out dividends, you can use that income to pay your bills in times of war, pandemic, or political shifts that bring down the market. It’s a good idea to pay yourself first, before using this money to invest in other asset classes.
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.