Despite the seeming associated risk, equity investment has proven to be the best performing investment window, whether in a bullish or bearish market when compared to other investment options like bonds and fixed income instruments in the money market. Typically, stock returns are derived from capital appreciation, dividends and even bonus issues. Dividends payment have historically accounted for 20 to 40 percent of the average annual stock market returns. A lesser known fact is that reinvested dividends have provided for between 44 to 97 percent of historical stock market returns.
During tough market conditions such as the down market that we are now experiencing, investors should realize that counting their losses will not prevent further losses. They should rather change their investment perception and tag along with the market as it presents itself. Investors should take advantage of the opportunity of low priced equities to position in the market in anticipation of full year earnings of quoted companies in the first quarter of 2017, considering the present high dividend yield of stocks.
For now, there is no expectation of corporate results that will influence prices of stock, but with external forces or information that can drive the nation stock market since the liquidity level remains tight and the government has failed to look into the plight of its citizens that have lost fortunes in the market as a result of deteriorating economic situation. The falling prices of equities on the floor of the exchange has pushed dividend yield of many stocks and some sectors up.
But given the uncertainty of corporate earnings amidst the current economic slowdown, the market is probably showing that the dividend cut which has largely been concentrated on the manufacturing sector would spread over to other industries as well. Investors should be careful as the outlook for dividend growth in general in 2017 is slim, since some of the recent released earnings have revealed how many companies would be next year.
However, if you can achieve at least anything above 8% yield to cover the half rise in inflation you would be able to weather any short-term and long-term weakness in the stock market. This does not mean that I am recommending a huge portion of your long-term portfolio in bonds, which are normally sold to retirees as a ‘safe and reliable source of income.’ You do get a fixed payment every period or so, but the purchasing power of this payment declines over time.
Thus a very good strategy over the long run is to create a diversified portfolio of stocks, that have shown consistency in raising their dividends year after year and which spot an attractive dividend yield for your consideration. Here, it’s necessary for investors to know how the yield is computed whether based on forecast or historical dividend. Dividend yield is calculated by what have been paid by dividing the latest dividend with the current market price of the company. Higher yield does not guarantee increase in dividend payout.