The market crash has caused a wide range of blue-chip dividend stocks to experience disappointing total returns in recent months. However, now could be the right time for long-term investors to purchase a diverse range of them.
Blue-chip dividend stocks could be in strong positions to become more dominant within their industries. They may also be popular among investors during an uncertain period for the world economy, where their high income returns are significantly more attractive than those of other mainstream assets.
Market positions
The size, scale and financial strength of blue-chip stocks could mean that they are able to take advantage of a weak economy to extend their market positions. Smaller sector peers may struggle to survive the economic challenges facing many countries across the world due to coronavirus. This could present an opportunity for their larger peers to gain market share, which may lead to higher profitability in the coming years.
Of course, not all blue-chip stocks will have strong balance sheets that enable them to extend their market positions. Therefore, investors should focus on those businesses with modest debt levels, large cash positions and a competitive advantage to increase their chances of generating high returns in the long run.
Investor demand
While the stock market is highly likely to fully recover from its recent crash, it may take time for investor sentiment to return to pre-crash levels. Investors, for example, may gradually shift their focus towards risky assets as opposed to a sudden shift towards a lower level of risk aversion. They may be more likely to buy companies that have strong market positions, which is often the case among blue-chip shares. Therefore, demand for blue-chip stocks could be relatively high in the medium term.
This may equate to rising prices for blue-chip stocks. As such, through buying a diverse range of them today, you could successfully position your portfolio for future growth.
High returns
The fall in prices for a wide range of stocks means that they now offer high yields in many cases. This could make them highly attractive to income investors at a time when the return prospects of assets such as bonds and cash are relatively unappealing. Low interest rates look set to remain in place over the medium term to support the world economy's recovery, which could lead to sustained high demand for dividend stocks.
Therefore, those companies with affordable and relatively secure dividends could become increasingly popular. They may offer a more favourable risk/reward opportunity than other assets. This does not necessarily mean that they will avoid further stock price declines in the short run, since coronavirus could remain a threat over the coming months. But for long-term investors, now could be the right time to purchase blue-chip stocks after their recent declines and hold them for the long run.
