Stocks got hammered yesterday, falling nearly 200 Dow points. And it look like more trouble in global markets today as fears of deflation take hold across the world. See Swiss National Bank Abandons Minimum Exchange Rate Against Euro.
So what's a long term focused saver and individual investor to do? Well, let's take a close look at the role of dividends in investing successfully.
Today blue chip dividend paying stocks are offering higher current yields (~3%) than those on high quality bonds (10 year government bonds yield less than 2%). For several individual examples of blue chip dividend paying stocks, see the 'Summing Up' portion of our post dated January 12 titled "Stock Market Volatility and Falling Oil Prices ...."
And the current unusual situation of high dividend yields relative to interest rates could stay that way for many years as inflation and interest rates remain at historic lows and companies continue to grow their sales and earnings. Thus, owning a basket of relatively high yielding dividend stocks makes sense to me.
Why dividend growth is important for young workers tells the story of why it may make sense for you as well:
"When investing in stocks, it's important to understand the role that cash dividends play.
Over long time frames, dividends have been responsible for more than 40% of the total return of some of the major indexes. Dividend paying stocks also tend to be good performers. . . .
|Three Years||Five Years||10 Years|
|S&P 500 Index||20.41%||15.45%||7.67%|
Individuals in the accumulation phase of saving and investing for their long term needs should definitely strongly consider the effect of rising dividends. . . .
Now let's take a look at hypothetically investing in the Dow Jones Industrial Average . . . . Assume that you purchased one share of DIA (Dow Diamonds fund) on Jan. 20, 1998 for $77.81. At the end of 1999, your first full year owning the fund, you'd have collected $1.53 in dividends for a realized yield of 1.98%.
As of Dec. 26, 2014, over a period of about 17 years, you would have collected $40.96 in dividends, which means that over 50% of your initial investment would have been returned to you in cash payments. For the calendar year 2014, you would have collected $3.45 in dividends. So, your realized dividend yield for 2014 based on your original investment of $77.81 would have been 4.44%.
The important concept here is that in your 17-year holding period, while the price of the fund has more than doubled, so has your dividend yield. Your dividend yield has increased from less than 2% to more than 4%. Dividend growth can affect your future income stream in a very profound way."
Dividend yields on many dividend paying blue chip stocks today are considerably higher than interest rates on government bonds.
Interest rates are at historic lows and likely to stay that way for several years.
Inflation is non-existent and likely to stay that way too.
Oil prices have fallen dramatically and will remain relatively low over time.
The U.S. economy is performing reasonably well while other countries are definitely struggling to avoid deflation. That means the U.S. dollar should remain strong and U.S. interest rates should stay low.
To repeat, cash dividends on U.S. blue chip stocks currently yield more than bonds, and regular increases in those dividends are likely over time. As earnings increase over the years, share prices should rise too.
Thus, I'm sticking with blue chips and prepared to ride out the storm.