The prospects for dividend stocks appear to be highly uncertain in the near term due to the expected economic slowdown caused by coronavirus. As such, many investors may currently be avoiding the purchase of dividend stocks to evade potential paper losses in the short run.
Now, though, could prove to be a favourable buying opportunity for long-term investors. Many stocks offer wide margins of safety due to weak investor sentiment, while the recovery potential of the economy could produce impressive returns for the stock market in the coming years.
Investor fear
As is often the case during periods of economic uncertainty, investor sentiment has been relatively weak in recent months. This has prompted a severe decline in valuations across the stock market, with many investors seeking to sell their holdings to try and avoid further paper losses.
While this may not seem to be the right time to invest, it could be an ideal opportunity to buy stocks when they are trading at low prices. In many cases, companies now trade on yields and valuations that were last seen during the global financial crisis. This suggests they offer wide margins of safety that could lead to strong returns in the long run.
Most investors would rather buy a stock when it has a low price, rather than a high price. However, for it to trade at a low price level, economic uncertainty is usually required. While this can cause a high degree of volatility in the short run, it could enable you to obtain high-quality stocks while they trade at exceptionally low prices. Over the long run, this could enhance your overall returns.
Economic cycle
At the present time, the prospects for the world economy are relatively downbeat due to the impact of coronavirus. A recovery may seem unlikely, but history shows that the economy's performance is cyclical.
As such, current economic difficulties may last for many months, but the world economy's track record shows that it is likely to recover. Previous global slowdowns, such as the financial crisis, felt as though they would last for a lengthy period of time while they were occurring. Although in some cases they caused significant pain across many industries and sectors, global GDP growth has always picked up in the years following economic slowdowns to eventually return to relatively high levels.
Investors who can capitalise on the cyclicality of the world economy through buying during downturns could generate relatively high returns in the long run. Their portfolios are likely to experience paper losses in the short run, since finding the bottom of the stock market's decline is exceptionally difficult. But through buying a diverse range of high-quality dividend stocks and holding them for the long term, you could produce high returns that boost your financial future.
