Make Dividends Your Stock Stop Loss

I’m a big believer in dividend investing. Stocks that can bring your the best of both worlds, income and growth should be embraced in everyone’s portfolio. But dividends also bring another benefit, they help keep stock prices up when others are suffering.

The Role of Dividends

Dividends are wonderful things for any investor. They help to provide an income just for holding a stock…one that can already appreciate on its own. They help investors compound their positions, utilizing dividend income to buy more shares. Also, they serve to generate an income nearly equal to corporate debt for investors who like a little more risk.

Consider Dividends

Sizable dividends from blue chip stocks can serve as excellent ways to protect your wealth. Let’s say there is a stock out there yielding 5%. You’re interested, you like the fundamentals, and of course you love the dividend. So, your options, at least right now, are to invest in corporate debt (which could fall as rates rise), money markets (which pay nothing), or this dividend stock (which pays equal to corporate debt plus has a fair chance at appreciation). Clearly, the dividend stock is the best choice.

Downside Protection

Since the dividend is a healthy 5%, it is unlikely the stock will fall further than its current price assuming the dividend remains at a 5% yield. Why? Why not? Investors who want an income should be more than willing to buy a solid name at 5%…they already buy them at 2-3% and lower yields. They already lend to them at lower rates. Dividend stocks do excellent during recession because people want the yields, with the security that the stock is likely to fall. Don’t be greedy, though, don’t put all your eggs in one basket and don’t move all your fixed income investments to stocks.