Rather than being fearful and taking drastic measures, dividend stocks can help you hedge against market corrections.
In stock trading, you need to be prepared for the highs and the lows. When the stock market reaches the position of an all-time high, traders and investors are urged to be cautious as analysts fear the market falling from a cliff after reaching the top. Expert analyst Sean Williams of The Motley Fool gives his take.
Market Indexes Have Been Setting Record Highs
Williams notes that long-term investors who’ve held on to their investments for over eight years, since the bottoming out of the market, are benefiting from some great returns. The Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite were up 246%, 275% and 415% respectively through Wednesday, the 4th of October, 2017 from their lows on March 9, 2009. All these indexes were able to close with an all-time record high again. To put that into perspective, there are over 40 new record highs for the Dow this year, and over 50 new record highs for the Nasdaq Composite.
Now this has surely cheered up investors, while there are also the sceptical ones who are worried that the stock market could be heading to a fall soon because of various factors such as international political tensions and the interest rates that keep rising. The Congress too hasn’t been able to bring about any significant reforms. These fears are getting stronger since investors know that there have been 35 corrections amounting to 10% or more in the S&P 500 since 1950, when you round it to the closest whole number. So the fears now deal with whether a correction could be around the corner.
Dividend Stocks for Hedging against Market Corrections
So when the stock market is at a record high, reassess the investment you’ve set apart for each holding. Then, Williams suggests including dividend stocks for hedging against any market corrections if they take place soon.
- Williams recommends dividend stocks because of the many advantages these stocks offer. For one, going by a historical basis, dividend stocks have outperformed non-dividend paying ones. Primarily, dividends serve as an indication for investors seeking income and searching for reliable business models. Dividend will only be paid if the concerned company is in a financially healthy state and its profits are expected to continue.
- Williams also suggests that dividends, as mentioned before, can help you face any stock market corrections that could occur. The income provided by the dividend stock will help ease your mind when you encounter any short-term loss as a result of a market correction.
- Dividends can also be invested back into more of the shares of a dividend-paying stock. Williams suggests Drip, or dividend reinvestment plan, for investors to multiply the shares of their stock along with the dividend income they receive over time. This strategy has been used by money managers to help increase their clients’ wealth in the long run.
So, with the right strategy you can be prepared for market corrections. Dividend stocks are a way to protect yourself. Combining that with the ability to execute dividend stocks for free, and investors can keep their costs to a minimum. Trade dividend stocks, and all other stocks both long and short, commission free with TradeZero.
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