It Is Best To Hold Dividend Stocks For The Long-Term Amidst Stock Market Volatility
The stock market is still undecided on its direction as it continues ebbing up and down. The technical tools for analyzing trends in the stock market are also not perfect.
One alternative in periods of uncertainty is choosing to hold stocks with a long horizon in mind. In doing so, you would not have to care about the rise and fall of stock prices. To relieve some pressure, I have recommended more of dividend stocks recently. In this article, I will discuss in detail some dividend stocks that I have in mind.
How To Pick Dividend Stocks?
Firstly, dividend stocks are not equivalent to high dividend stocks. Of course, it would be great if a stock offers high dividends, but you must check its dividend distribution over the past five years before you buy it. Is it growing year after year or is the distribution inconsistent?
Speaking of dividend distribution, I’m not referring to dividend yield here, but rather how much money is distributed per share. In fact, high dividend yields can be explained by a sharp drop in share prices. If the company were unable to distribute the same dividend per share, one would face the problem of falling yield-to-cost.
The most important deciding factor to dividend stocks is not its current dividend yield, but its expected yield-to-cost in the long run. The future dividend yield should be calculated based on the stock’s current price.
Suppose that, 10 years ago, you bought stock A at $10 when the company was issuing a dividend of $0.3 per share. That would translate to a yield of 3 percent. If it now issues a dividend of $1.8 per share, your yield-to-cost would be 18 percent! That is notwithstanding the fact that dividend growth stock would also increase in share price! Assuming the stock still trades at a valuation of a 3 percent yield on the $1.8 dividend per share, the stock would have appreciated to $60 per share!
Comparatively, if you had bought a high-yielding stock B at $10 ten years ago and stock B is still issuing a dividend of $0.8 per share then and today, this would translate to a yield of 8 percent which is still pretty high and decent. But stock B is definitely less attractive than stock A.