Many investors are worried that a recession may hit North America very soon. And with dividend stocks being a popular vehicle to grow wealth, the question of whether investors should hold them during a recession is a very valid one.
Dividend income could offer a source of growth for your portfolio, even in troubled times
During a recession, it can be difficult to find good stocks to invest in, as it’s hard to find optimism during such periods. That’s where having a quality dividend stock in your portfolio can be a way that you can grow your portfolio’s value, even during a very dark period. While you might see the value of your overall dividend stock decline in value, if you’ve selected a stable one, then you’ll have the confidence in knowing that it will recover and that any “losses” that you see during a recession are only paper losses that likely will disappear once the recession is over.
Take a stock like Toronto-Dominion Bank (TSX:TD)(NYSE:TD) for example. While its share price may have had some down years, the bank stock has consistently paid a dividend for decades. Investing in bank stocks is one of the safest ways for investors to make money over the long run. Not only do investors continue earning dividends, but the stocks are going to rise and bounce back from any downturn as well.
In addition to paying dividends, TD has also routinely increased them as well. With strong profits and good cash flow, the bank has a very manageable payout ratio and normally has a good buffer so that in even in less-than-ideal conditions, the stock can continue paying its shareholders a good dividend. Inside of a TFSA, it could be a way for investors to still bank on some good dividend income that could be tax-free as well.
Falling share prices could uncover significant buying opportunities
If you don’t hold dividend stocks during a recession, it could be a great time to buy them. TD is as safe a bet as you can find out there in terms of dividend income. And so if the dividend is very safe and the stock is likely to recover, then buying during a downturn could not only lock in a higher effective yield for investors, but it could maximize the potential returns that they can get by buying a stock like TD at a low point.
While this may be a risky strategy for dividend stocks in general, that’s where having identified a quality dividend stock like TD can minimize your overall risk. This is not a strategy that will work for any stock, and that’s why investing in blue-chip dividend stocks during a recession could pay off in multiple ways. If you do own dividend stocks during a recession, it could also be a good time to buy more shares, as their prices fall to not only bring your average cost down but to accumulate more dividend income as well.
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Fool contributor David Jagielski has no position in any of the stocks mentioned.