Why I’d Buy Dividend Shares Now to Capitalise on the Stock Market Recovery

Dividend shares could offer high total returns in the stock market recovery. As such, they could be worth buying now and holding for the long run.

As well as providing a generous passive income, dividend shares could deliver impressive capital growth in a stock market recovery.

Their high yields could become increasingly appealing to income investors with limited options among other mainstream assets. Furthermore, the low valuations of many income shares could mean they offer good value for money and significant scope for gains over the long run.

With a large proportion of the stock market’s past total returns having been generated from the reinvestment of dividends, buying income shares could be a sound means of outperforming the index.

The increasing popularity of dividend shares

While dividend shares have always been a means of obtaining a passive income, today they could prove to be the best option by some distance for many investors. That’s not only because many dividend stocks have high yields, but also because income returns available elsewhere are relatively low.

The loose monetary policies pursued over the past 10+ years, as well as falling interest rates across major economies following the 2020 market crash, mean that the returns on cash and bonds are extremely disappointing. For many people, they are too low to even consider when it comes to obtaining an income from their capital. As such, they may be pushed towards dividend stocks in order to generate a worthwhile passive income.

This situation may mean that demand for dividend shares increases over the coming years. Certainly, interest rates will rise at some point in future. However, that could be many months, or even many years, away. The result of this could be rising demand for income shares that pushes their prices higher.

Total return potential

As mentioned, many income shares appear to offer good value for money at the present time. Since the 2020 market crash, many investors have focused on growth stocks, rather than dividend shares. This could mean there is scope for large capital gains from a portfolio of income shares that enables them to outperform the wider stock market.

The historic returns of indexes such as the FTSE 100 shows that a large proportion of total returns have been derived from the reinvestment of dividends. As such, investors who do not need, or desire, an income in the short run could buy income stocks and reinvest the shareholder returns received. This may enable them to earn a relatively high return in the coming years.

Clearly, it is important to diversify across a wide range of dividend shares. Although many of them are solid businesses with sound financial positions, the uncertain outlook for the economy may hold back their performances in the short run. However, buying a range of them could produce higher returns, as well as lower risks, to benefit from a long-term stock market rally.

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

A worker overlooks an oil refinery plant.
Energy Stocks

What to Know About Canadian Energy Stocks for 2025

Today, I'll explore tariffs, pipelines, and profit potential on TSX energy stocks for 2025, and how Suncor stock and two…

Read more »

An investor uses a tablet
Bank Stocks

Better Banking Stock: Royal Bank vs TD Bank?

Royal Bank has outperformed TD in recent years. Will 2025 be different?

Read more »

Canadian Dollars bills
Dividend Stocks

Invest $22,000 in 2 TSX Stocks for $1,279 in Passive Income

Passive income doesn't need to be difficult or costly, and these two stocks offer it up in spades!

Read more »

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

The Best Canadian Dividend Stocks to Buy and Hold Forever in a TFSA

These Canadian stocks all pay reliable dividends and consistently grow their earnings, making them three of the best to buy…

Read more »

Stocks for Beginners

The Best Stocks to Invest $25,000 in Right Now

Got a bunch of cash to deploy? These four Canadian stocks would make an excellent start for a long-term investment…

Read more »

Dividend Stocks

Got $1,000? 3 REITs to Buy and Hold Forever

Do you want some REITs to buy and hold forever? Here’s a look at a trio of options to consider…

Read more »

data analyze research
Dividend Stocks

2 Stocks I Loaded Up on in 2024 for Long-Term Wealth

A tech giant and a renewable energy giant were strong picks in 2024 and will continue to be strong through…

Read more »

dividend growth for passive income
Dividend Stocks

Need Decades of Passive Income? 2 Stocks to Buy Without Delay

These two dividend stocks offer it all. Stable passive income, with growth opportunities already on the way.

Read more »