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.
Image source: Getty Images
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.
