The best any expert can say about the stock market right now is that future returns will be uncertain, and volatility may be the new normal. Although there are slivers of light shining on some parts of the economy, many storm clouds darken the near to intermediate-term outlook on the stock market.

Make no mistake; this is not a gloom and doom stock forecast. Quite the contrary, investors should maintain a cautious optimism and remain invested in the stock market, albeit fully hedged against uncertainty and volatility.

One of the best strategies for accomplishing this is investing in dividend stocks as a portfolio stabilizer and a source of returns in an uncertain economy. In order to help you decide if dividend investing is right for you, we’ve put together this comprehensive guide. Of course, always consult with your financial advisor to understand what you’re buying and why you’re holding it in your portfolio.

What is Dividend Investing?

Dividend investing is a strategy focusing on investing in companies that regularly distribute a portion of their profit as dividends to shareholders. The most direct way a business can affect shareholder performance is through a cash dividend. A cash dividend is simply a return of investment to the shareholders. Each year, or each quarter, the board of directors announces a dividend that is paid in cash—sometimes in stock—directly to shareholders. 

The better-performing companies will periodically increase their dividends. Some companies have been paying dividends for decades, so it becomes an expectation and a way to attract new investors. Once a company starts paying a dividend, it will go to any length to continue to pay it because not doing so indicates the company may be in trouble. 

Creating Your Dividend Investing Strategy 

Not all dividend stocks are created equal. As with any investment class, it’s important to establish strict criteria for selecting the stocks that best match your profile and meet some standard of quality. Chasing the highest yields can be as risky as investing in junk bonds. Over the long term, companies with an established record of uninterrupted dividends, a clean balance sheet, and a positive earnings outlook will outperform the higher-yielding investments in terms of both dividend income and capital appreciation. 

When investing for the long term, diversification is always the key. With dividend stocks, you can invest across many sectors and among various dividend-paying investments, such as common stock, preferred stock, real estate investment trusts (REIT), ETFs, and mutual funds. 

What to Look for in a Dividend-Paying Company

With dividend stocks, investors need to apply the same due diligence they would use to purchase any stock, careful not to focus strictly on the dividend yield, which can be especially alluring after the stock price has fallen. It would be essential to know why the stock price fell and whether there may be the possibility of a dividend adjustment. 

One of the most important factors to consider is the company’s debt-to-equity ratio, which could put pressure on the dividend during a down economy if it is too high. Dividend payers that have no trouble generating excess cash flow can be relied upon to pay their debt and dividend in any economic environment. 

You also want to look at a company’s dividend payout ratio, calculated by dividing the annual dividends per share by earnings per share. The dividend payout ratio represents the portion of net income the company is paying out as cash dividends. Companies with a payout ratio of less than 50% are considered financially stable, with the potential to increase earnings over time. 

What to do with Cash Dividends

Investors need to decide what to do with their cash dividends. If the company is performing well and driving solid investment performance, you probably want to reinvest them back into the company. That drives investment performance further. However, if the multiples become unattractive over time, reinvesting in the company may not make sense. That should prompt a decision as to whether the stock is still attractive.

Whether you hold or reinvest your cash dividends in the company, they are subject to income taxes. The advantage of dividend income over other forms of income is it is taxed at a maximum rate of 20% (plus a 3.8% surtax for the highest-earning taxpayers). The tax rate for taxpayers in the lower tax brackets is 15%. 

Why Now Is the Time to Invest in Dividend Stocks

While high-quality dividend stocks are not likely to generate market-leading returns in any given year, they will lose less money on the downside, which is the key to growing portfolio value over the long term. Investing in high-quality dividend stocks is not about generating outsized returns; instead, it is about generating a rate of return meaningfully greater than the inflation rate while preserving capital during protracted market declines. Dividends are always positive, so they are a counterweight in down markets.

Many investors are unaware that dividend yield and growth have accounted for approximately 40% of long-term stock returns since 1930. During decades when inflation averaged more than 5%, they accounted for 54%. 

Eventually, the U.S. economy will right itself, and sanity and stability will return to the markets with large-cap, dividend-paying companies leading the way. Until then, and even then, dividend stocks will provide an effective counterweight to most risks investors will encounter, including inflationary pressures (or stagflation), increased market volatility, interest rate fluctuations, or market declines. There has never been a better time to make dividend stocks an integral part of your investment portfolio.

Adding a dividend stock component to your portfolio will not only increase your tolerance for volatile markets, but it can also become an enduring source of income regardless of the movement of stock prices, inflation, and interest rates. 

Ready to find out if dividend investing could be the ballast you need in uncertain times? Or perhaps a source of income you could use to fund your future retirement?

No matter where you are in your investing or retirement journey, our team at Platt Wealth Management can help. Simply schedule an appointment with one of our trusted advisors to discuss your opportunities today.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

Retirement is supposed to be a time of relaxation and enjoyment, but sometimes things don’t go as planned. One of the biggest challenges retirees face is the unpredictability of the stock market. A bad sequence of returns early in retirement can be devastating and leave retirees with no options.

But it’s important to remember the effort you’ve put into building your financial foundation. You’ve put in years of hard work, and now it’s time to enjoy the rewards of your dedication! Like every other obstacle you’ve navigated, you will get through this. Focus on your long-term goals and adapt your financial strategy while maintaining a positive outlook because retirement—even in a market downturn—still offers numerous opportunities to explore new interests, spend quality time with loved ones, and pursue lifelong passions.

Let’s explore ways to recover from a bad sequence of returns early in retirement.

Keep Your Cool: Tackling Challenges with Poise and Positivity

 We’ve said it before, but it bears repeating; keep calm and remain positive. Take a deep breath and remind yourself that the market has ups and downs. Keep a cool head and avoid making impulsive decisions. And remember, staying positive in the face of market fluctuations is a choice. Embrace your inner optimist, and you’ll survive the storm, becoming stronger and more resilient.

With a few simple tips, you can transform your everyday routine into a serene sanctuary and remain focused on the positive.

• Get Outside and Practice Mindfulness: Enjoy a leisurely walk in a park or forest, letting nature help you relax. Inhale the fresh air and appreciate the sights, sounds, and smells of the outdoors. Allow your thoughts to come and go.
• Digital Detox: Allocate screen-free time daily, allowing your mind to rest. Read a book, engage in a hobby or daydream. Experience the joy of being present in the moment.
• Get Moving: Exercise is a natural stress reliever. Find an activity you enjoy, such as yoga, dancing, or swimming. Stay active, release endorphins, and enjoy a more relaxed state.
• Remember the Cycles and Focus on the Long Term: Keep in mind that downturns are a normal part of the ride, and eventually, things will improve. Think of your investments as a flourishing garden that needs time to grow. It might have a few weeds now and then, but with patience and care, it will blossom into something beautiful.
• Stay Informed: Knowledge is power. Keep yourself updated on market trends and seek professional advice to make informed decisions. Understanding the bigger picture can help you stay calm and optimistic.

Budget Reset: Confront Financial Changes with Confidence

A bad sequence of returns can mean that you’ll need to adjust your budget. Look at your expenses and see where you can cut back. It’s essential to be realistic about your spending and to prioritize your needs. If your retirement savings have taken a hit, consider working part-time, supplementing your income, and building up your savings again.

Expenses to Trim:

• That gym membership you’re not using? Swap it for free yoga videos or join a walking group.
• Cut back on dining out – become a kitchen connoisseur and host dinner parties instead. Bye-bye, overpriced takeout. Hello, gourmet goddess!
• Reevaluate your subscriptions – do you really need Netflix, Hulu, and HBO Max? Enjoy one at a time instead.
• Save on travel costs by exploring local hidden gems. Who knew there was so much to discover right in your backyard? Check out your local tourism websites and plan a staycation this year!

Part-time Work Opportunities:

• Share your wisdom by becoming a consultant in your field. You’ve got the experience. Why not spread the wealth (knowledge)?
• Flex your creative muscles and try your hand at writing, photography, or even pottery. Etsy, here we come!
• Teach a class or workshop at your local community center. Empower the next generation while making a little extra cash.

Expert Insight: Diversify for Success and Consult an Advisor

Diversifying an investment portfolio is crucial for managing risk and ensuring long-term financial stability. By spreading investments across various asset classes (like stocks, bonds, and alternative investments), you reduce the impact of any single underperforming asset on your overall portfolio. Diversification helps mitigate risks associated with market fluctuations and increases the potential for higher returns.

Here’s how to build a well-balanced, diversified investment portfolio:

• Combine Different Assets: Consider stocks, bonds, and cash as the essential components of your financial portfolio. Mixing them creates a diversified structure that can handle market fluctuations.
• Add Alternative Investments: Real estate, commodities, and private equity can add diversity to your portfolio and help reduce overall risk.
• Explore Various Investment Types: Be open to different styles of investments, like growth and value stocks or short- and long-term bonds.
• Regularly Review and Rebalance: Periodically assess and rebalance your portfolio. As markets change, your investments should adapt accordingly. Stay informed on trends and adjust when needed to maintain a balanced portfolio.
• Consult a Financial Planner: A financial planner can assist you in creating a diversified portfolio tailored to your specific needs and risk tolerance, ensuring that your investments remain aligned with your goals.

Key Takeaways

Recovering from a bad sequence of returns early in retirement can be a challenge, but you can overcome it with the right mindset and strategies. Remember to stay positive, keep calm, and focus on your long-term goals. Consider adjusting your budget and exploring part-time work opportunities. Also, be sure to diversify your investment portfolio and seek the advice of a trusted financial advisor. If you don’t have one, Platt Wealth Management can help.  Schedule an introductory call to learn more.

By taking these steps, you can get back on track and enjoy the retirement you’ve always envisioned. Take charge of your financial future, adapt to the market’s ebbs and flows, and embrace the next exciting chapter of your life with confidence and resilience.

Remember, all new experiences in life require an adjustment period. Sure, it might be a little uncomfortable initially, but with a few strategic tweaks, you’ll be strutting your stuff in no time. Cheers to living your best (retired) life!

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.