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Dividend Stocks Are a Great Option During a Recession – Here’s Why

Last Updated September 23, 2020 1:46 PM
Stephanie Bedard-Chateauneuf
Last Updated September 23, 2020 1:46 PM
  • Stock market volatility is high due to uncertainties regarding Covid-19 and how it will impact the economy.
  • Dividend stocks usually withstand economic shocks better than growth stocks.
  • High and sustainable dividends provide some buffer to your portfolio as you keep getting them during market downturns.

Stock markets have been very volatile lately as a coronavirus-induced recession is looming. But a recession does not necessarily mean that you’ll lose all your money. Even when markets are plunging, you can still make money on stocks. High-yield dividend stocks can be an excellent investment during a recession.

Dividend Stocks Generally Withstand Recessions Better Than Other Stocks

High-yield stocks are usually less volatile than growth stocks . Investors are more willing to keep these high-income stocks during a bear market.

Historical 260-day annualized volatility of the S&P 500 Index and the S&P 500 Dividend Aristocrats Index, from 6/30/2014 to 6/30/2019. | Source: Invesco 

Growth stocks that don’t pay dividends, like Netflix (NASDAQ:NFLX), are nice to have in a bullish market as its share price can rise more than the average. But during a market downturn, growth stocks that don’t pay dividends can plunge sharply. You cannot count on a dividend to dampen your losses.

But with dividend stocks, your return comes from both share price appreciation and the dividend you receive. For example, AT&T  (NYSE:T) has a dividend yield of about 7%. If the stock gains 5%, the total return you’ll get is 12% (share price appreciation + dividend yield). Meanwhile, if AT&T stock loses value, you will only suffer a loss if the value of the share drops by more than 7%.

When a dividend stock price falls, its dividend yield increases. The stock thus becomes more attractive to investors. You know that to make money with stocks, you need to buy low and sell high. By buying quality dividend stocks when prices are low, you can profit from a future rebound while earning an extra income as you wait for the rebound.

Growth of $100 invested in the S&P 500 Index and the S&P 500 Dividend Aristocrats Index, with and without reinvesting dividends, from 6/30/2009 to 6/30/2019. | Source: Invesco 

Also, it’s possible to outperform market indices with high-yield dividend stocks. By buying those stocks while they are cheap, you could beat the average market. Warren Buffett has made his fortune by buying quality stocks like Kraft Heinz (NYSE:KHC) and Coca-Cola (NYSE:KO) at low prices.

The Dividend Yield Is Not The Only Thing You Should Look At

But you shouldn’t look at only the dividend yield to choose your stocks. You should also consider the history of the stock. Companies with a solid history of stable or rising dividend payments are preferable.

It’s also good to look at the dividend payout ratio. You can calculate the payout ratio by dividing the annual dividend per share by earnings per share. A low payout ratio means that the company has enough room to keep paying its dividend even when times are tough.

High-yield dividend stocks can be a great place to invest during a recession. They can protect your capital to a certain point, as a high dividend yield provides a safety buffer in uncertain markets. By holding quality dividend stocks over a long period, you could even outperform the market.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com. The above should not be considered investing advice from CCN.com.