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Why dividends come into their own during share bear markets

I think that dividends are wonderful, particularly when share markets are going lower during a bear market.

Shares are meant to go up and down over the short-term. Every day there are different buyers and sellers of shares who have different views about the value of a business and different needs – someone may need to sell a share as soon as possible.

At the moment the share market is down quite heavily since 21 February 2020. The S&P/ASX 200 Index (ASX: XJO) is down by just over 30%.

Dividends can cushion the blow

If the share market were to fall 30% over a 12 month period, the dividends could reduce that total return fall by a few percent, plus the franking credits.

Indeed, if you think long-term and don’t sell out of fear, the only thing that’s happened is that your investment has paid you dividend cash during that time. If the market recovers in a year or two, then the paper loss will have evaporated, you’ll be sitting on gains and you’ll have received dividends during that time.

That’s the great thing about dividends. Companies continue to pay dividends, assuming they keep making profits. And most companies do. Even if profits halve, they’re still making a good amount of profit.

Some shares have already predicted that their income payments to shareholders can continue as normal during this time, like Rural Funds Group (ASX: RFF).

There are several shares on the ASX that have increased their dividends for many years in a row which are unlikely to stop that record any time soon such as Ramsay Health Care Limited (ASX: RHC), APA Group (ASX: APA) and Growthpoint Properties Australia Ltd (ASX: GOZ).

According to previous studies, dividends can make up to 50% of long-term compounding returns. They’re very important. Dividends are a great way to be rewarded simply for holding shares.

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Motley Fool contributor Tristan Harrison owns shares of RURALFUNDS STAPLED. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED. The Motley Fool Australia has recommended Ramsay Health Care Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.