Dividend investing usually benefits from low interest rates

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Dear Money Lady:

Any tips on how to deal with the stock market this year? I don’t know what to do with my investments.

Thanks, Jim.

You are not alone Jim, as lots of people are still worried.

I have had many questions about the stock market. I want you to consider an investment approach which can shelter you from the coming “shake-ups” in 2021. When yields are likely to stay low and markets have a tendency to have future volatility, dividend strategies should be revisited. Start moving more of your investments towards high-quality dividend payers and high-quality growth-name stock picks. This has always been a valuable strategy in this type of environment, especially given the “lower for longer” interest rate road put in place by the United States Federal Reserve Bank and the Bank of Canada (a freeze on rate increases until 2024, due to below targeted inflation numbers).

Remember that lower interest rates have always typically benefited dividend investing and a good dividend-focused strategy helps to combat elevated market volatility. When it comes to growth stocks, lower interest rates always tend to support higher valuations. This strategy will limit your losses during market declines but also will perform well during periods of market strength – something we expect in the next three to five years as we anticipate a new bull market after COVID.

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It is important to remember that price swings will occur in both directions this year, and while we never want to lose money, corrections often represent healthy and necessary periods during a new bull market. The next six months will have many market corrections. If you look back at the historicals of the S&P 500 – market performance tends to rebound quite quickly once corrections have fully run their course. For example, a review of market drops and corrections of the S&P 500 from June 1948 to September 2020 demonstrates that in three-, six- and 12-month categories, after hitting the correction troughs in the market, on average the rise was 15.6 per cent, 22.1 per cent and 29.5 per cent respectively.

Another thing to remember is that when you analyze the beginning of bull markets, the performance tends to flatten out after the initial three-month burst, before the next leg higher. Investors should stay put and not be too nervous or overly concerned about selloffs and uptick volatility. Do not waiver here folks, there will be some unexpected volatility which will at times remain elevated in the coming months as investors continue to doubt the validity and sustainability of the bull market.

With the current low rates, along with elevated volatility levels, this new 2021 market landscape provides an excellent opportunity for investors to selectively increase exposure toward dividend paying stocks. Talk to your advisor to see if this is something you should consider.

Good luck and best wishes.

Christine Ibbotson

Written by Christine Ibbotson, author of four finance books and the Canadian best-selling book ,“How to Retire Debt Free & Wealthy”. Go to www.askthemoneylady.ca or send a question to info@askthemoneylady.ca .

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