A strategy to beat dividend stocks

The main trading room of the Tokyo Stock Exchange,where trading is currently completed through computers. (Photo credit: Wikipedia)

For years, investors have looked to dividend stocks as a great all-purpose investment. Not only do dividend stocks provide you with the income many people need to cover living expenses, they also often provide some downside protection when markets start to decline.

But just because dividend stocks have favourable characteristics doesn’t mean that they’re always your best bet. In particular, when you expect the market to rebound sharply, sticking with dividend stocks – especially in defensively positioned industries — can lead to subpar returns.

Looking back at the “junk stock” phenomenon

In 2009, during the depths of the financial crisis, the stock market seemed to be in serious trouble. Many companies were on the verge of failure, as tight credit conditions made it nearly impossible for cash-poor businesses to get the financing they needed. As a result, investors gravitated toward companies in better financial shape, with cash reserves to survive however long the crisis might last. Many of those safer companies were dividend stocks, with business models that not only produced enough cash to finance ongoing operations but also left enough additional money to make dividend distributions to shareholders. ... Continue to read.

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