Why I’d Buy and Hold Cheap Dividend Stocks for the Next 10 Years

Cheap dividend stocks could offer a potent mix of a generous passive income and impressive capital returns over the long run in my opinion.

Various Canadian dollars in gray pants pocket

Image source: Getty Images

Buying and holding cheap dividend stocks could provide more than just a generous passive income over the long run. A low interest rate environment may mean that demand for companies with high yields and dividend growth potential increases over the medium term.

Furthermore, the recent market crash means that many income shares currently trade at low prices. This suggests that they could benefit from a likely improving economic outlook over the next decade. As such, now could be the right time to buy a diverse range of dividend shares.

Increasing demand for dividend stocks

Dividend stocks may not currently be particularly popular. The uncertain economic outlook means that many investors are cautious when it comes to investing money in the stock market. They may fear experiencing losses in the short run if risks such as Brexit and the coronavirus pandemic prompt a weakening in investor sentiment.

However, over the long run, the appeal of income shares could increase. Interest rates are currently at a low level and may fail to rise rapidly even if the economic outlook improves. As such, income-seeking investors may be drawn into dividend shares by their relatively high yields at a time when other mainstream assets such as cash and bonds offer relatively unattractive returns. This may help to push the share prices of income stocks higher, thereby providing capital returns for investors alongside their generous yields.

Dividend growth opportunities

Dividend stocks may also offer high long-term returns due to their potential to increase shareholder payouts in the coming years. The current global economic outlook is relatively challenging. However, its track record shows that it has always returned to positive growth following periods of decline. And, with major fiscal and monetary policy stimulus having been enacted in major economies, the outlook for many companies could improve. This could allow them to pay a larger amount in dividends to their shareholders.

Companies that can produce impressive rates of dividend growth may become more appealing to investors. Rising dividends can often highlight improving profitability, as well as management confidence in the company’s outlook. This may act as a buying signal for investors that pushes the share prices of dividend growth stocks higher.

Low current valuations

Another reason to buy dividend stocks today is that they are priced at cheap levels in many cases. Weak investor sentiment towards the stock market means that many high-quality companies currently have yields that are significantly higher than their long-term averages. This suggests that they have wide margins of safety and may offer capital return potential as investor sentiment improves in the coming years.

As such, now could be the right time for an investor to buy and hold dividend shares. Their passive income potential and the prospect of capital returns may lead to impressive total returns as the world economy recovers

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

Growth from coins
Dividend Stocks

1 Dividend-Growth Stock to Buy and Hold for the Next 15 Years

CN Rail (TSX:CNR) is a dividend-growth giant worth buying on weakness in July.

Read more »

analyze data
Dividend Stocks

The 5.11% Dividend Stock Set to Dominate the TSX

Brookfield Infrastructure (TSX:BIP.UN) has already been dominating the TSX, but more is certainly on the way.

Read more »

stock analysis

3 TSX Stocks You Can Confidently Buy Now and Hold Forever

These three companies are some of the top stocks on the TSX, giving you the confidence to buy now and…

Read more »

sale discount best price
Dividend Stocks

3 Remarkably Cheap TSX Stocks to Buy Right Now

Investing in undervalued TSX stocks such as Eldorado Gold should help Canadians derive steady gains in 2024 and beyond.

Read more »

Piggy bank with word TFSA for tax-free savings accounts.

2 Magnificent Dividend Stocks I Plan to Add to My TFSA in August

Here are two magnificent dividend stocks long-term investors may certainly want to hone in on before the next bull cycle…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

1 TSX Stock That Could Help Set You Up for Life

Early investors in Intact Financial (TSX:IFC) stock could earn a 17% dividend yield in 2024. Here's how IFC stock could…

Read more »

Canadian Dollars
Dividend Stocks

2 Magnificent Ultra-High-Yield Dividend Stocks That Are Screaming Buys in July

These two top Canadian dividend stocks offer over 8% annualized dividend yield in July, making them really attractive to buy…

Read more »

Gold bullion on a chart
Metals and Mining Stocks

Gold Price Plummets: 2 Gold Stocks to Keep an Eye On

Stable as it is in the long term, even gold is not immune to price fluctuations and slumps. This is…

Read more »