The recent stock market crash may have caused many investors to doubt the appeal of equities. After all, their prices declined by a significant amount in a very short period of time. Looking ahead, further falls in the stock market would not be a major surprise due to the ongoing risks posed by coronavirus.
However, stocks could still be a better long-term investment than gold. They have low valuations, high yields and recovery potential. As such, buying a range of dividend stocks today and holding them for the long run could be a sound means of improving your chances of retiring early.
While stock prices may have come under severe pressure in 2020, the popularity of gold has increased significantly. The precious metal has reached a seven-year high, and could experience rising demand among investors should the prospects for the world economy continue to be uncertain over the coming months.
However, over the long term gold may lack total return potential. Its high price could indicate that there is limited scope for capital growth compared to undervalued stocks. Furthermore, investor sentiment is likely to recover from the low levels experienced this year as the outlook for the world economy improves. This has taken place after every previous bear market, and could mean that the appeal of defensive assets such as gold decreases as investors become less risk averse.
Improving investor sentiment could lift stock prices over the long run. This could help to improve your retirement prospects through producing a larger nest egg from which to generate a passive income in older age.
Of course, a recovery in stock prices may seem highly unlikely at the present time. But in every previous bear market there have been moments where the outlook for equities and the world economy have been exceptionally downbeat. Yet the stock market has produced a recovery from every downturn it has experienced in its history. Investors who have purchased stocks while they are undervalued during such periods have generally experienced strong returns in the bull markets that have always followed bear markets.
Dividend stocks could be highly attractive for investors who are aiming to build a retirement nest egg over the long run. Reinvesting dividends has historically accounted for a large portion of the stock market’s total returns. Therefore, companies that trade on high yields could appeal to growth investors and not only to income-seeking investors.
Through purchasing companies that have generous dividend cover, which is calculated by dividing net profit by dividends paid, it is possible to obtain a relatively robust passive income stream that can be reinvested over the coming years. This strategy may lead to higher returns that ultimately help you to reach your goal of retiring early.
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Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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.