It’s been a rough ride this year for growth investors.
Rising interest rates, coupled with a lower appetite for losses, have dented confidence in the once red-hot sector.
The NASDAQ Composite Index, well-known for being a bellwether technology growth stock index, has skidded 29% year to date and is mired in a punishing bear market.
Large-cap technology stocks such as Amazon (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOGL) have tumbled 45% and 33% year to date, respectively.
On the flip side, stocks that dole out dividends have held up relatively well.
Investors are glad to receive a steady stream of income that can help them through these challenging times.
And as the spectre of a recession looms, perhaps it’s time you should consider parking some money in dividend stocks.
Here are some great reasons why dividend stocks make sense within your portfolio.
Robust balance sheet, strong cash generation
Companies that pay out dividends are usually armed with a sturdy balance sheet and can generate healthy operating and free cash flows.
Many of them are also market leaders in their industry and enjoy strong competitive moats.
These characteristics allow them to withstand economic stress.
In contrast, some fast-growing stocks may rely on debt or equity financing as a means to grow quickly.
With rising rates, such businesses will get hit badly as finance costs jump, while equity financing becomes more dilutive as share prices decline.
A good example of a company with a robust balance sheet is conglomerate Boustead Singapore Limited (SGX: F9D), or BSL.
The group resumed paying out dividends back in fiscal 2003 (FY2003) and since then, not a single year has gone by where it did not declare a dividend.
BSL has a net cash balance of S$379.7 million as of 30 September 2022 which can help it tide through a possible recession.
Despite the group’s core net profit falling by 28% year on year to S$13.6 million, free cash flow surged by 163.2% year on year to S$41.5 million.
Lower share price declines
Armed with these attributes, dividend-paying stocks end up suffering from less volatility in their share prices compared with growth stocks.
Growth stocks generally have high expectations baked into their share prices as investors expect blistering growth to be sustained.
Once growth slows down, valuations, along with share prices, can come crashing back down to reality.
For BSL, its share price is down by slightly more than one-fifth year to date.
Other consistent dividend payers such as vehicle inspection outfit VICOM Limited (SGX: WJP) and integrated healthcare player Raffles Medical Group (SGX: BSL) have seen their share prices decline by even less.
VICOM’s shares have slid just 5.4% year to date while Raffles Medical’s shares have declined by just 2.2%.
Getting paid while you wait
Investors buy growth stocks for the prospect of capital gains when their share prices rise above what they purchased them for.
However, when a recession hits and share prices plunge, these investors will suffer unrealised capital losses and need to wait patiently for a recovery before they can realise some profits.
Dividend stocks have the advantage of paying you a steady stream of income while you wait for the recovery.
Although the share prices of dividend stocks may also decline, you are at least being paid in cold, hard cash to ride through the tough times.
The dividend you receive serves two purposes.
First, it can be used as ammunition to purchase the very same stocks that paid out these dividends, allowing you to effectively compound your wealth for retirement.
Second, these dividends serve as a tangible return on your investment as opposed to the ephemeral capital gains promised by growth stocks.
Get Smart: Include dividend stocks in your portfolio
The merits of dividend stocks cannot be overstated.
Only businesses that generate healthy free cash flow can pay out consistent dividends.
Hence, when you purchase such stocks, you are inherently fortifying your investment portfolio against a punishing downturn.
Dividends are also useful as they act as a stream of cash that you can use as you please.
They can help to supplement your earned income or substitute your active income should you decide to retire.
It’s time to take action and include dividend-paying stocks within your portfolio.
Over time, these companies can see their business growing steadily and their dividends should also rise in tandem.
Not only will you end up with higher dividends, but the share prices of these stocks should also steadily rise to match business growth, rewarding you with a double bonus.
Not sure where to park your money in 2023? Give dividend stocks a try. You don’t need a lot of capital to start a stream of passive income. Our latest guide will show you how to invest and where to find the juicy dividends in SGX. Click here to download the report for FREE.
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Disclaimer: Royston Yang owns shares of VICOM, Boustead Singapore Limited, Alphabet and Raffles Medical Group.
