Why I'd buy dividend shares in 2021 for growth and passive income

Dividend shares can offer strong capital growth in 2021, and a worthwhile passive income, due to a lack of opportunities available elsewhere.

dividend share

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Buying dividend shares has been a popular means of generating a passive income for many years. They provide a relatively high yield, as well as dividend growth potential.

However, their appeal could increase significantly over the next few years. A lack of income opportunities elsewhere may mean that demand for dividend shares rises rapidly. This may push their prices higher, and provide investors with capital growth.

As such, now could be the right time to build a diverse portfolio of income shares. Their total return prospects over the long run seem to be very attractive.

The passive income appeal of dividend shares

From a passive income perspective, dividend shares could be more attractive than ever. Despite the recent stock market rally, it is possible to buy a wide range of dividend stocks that can provide a high, and growing, passive income over the long run.

While this situation may be no different than in the past, what has changed over recent years is the difficulty in generating an income from other mainstream assets. Low interest rates mean that cash savings accounts offer sub-inflation returns in some cases. Meanwhile, rising bond prices prompted by lower interest rates mean that yields on many investment grade bonds have been squeezed.

As such, from an income perspective, dividend shares offer a significantly higher return than other income-producing assets. This may mean that many investors have little option but to use dividend stocks to provide them with a worthwhile passive income in 2021, and potentially in the coming years.

Capital growth opportunities from dividend shares

A rise in demand for dividend shares could push their prices higher. As ever, the performance of any stock is based on supply and demand among investors. Should there be a consistent period of buying among today's high-yielding shares, they could deliver attractive capital returns.

The result of this may be a potent mix of a high passive income and market-beating capital appreciation. As such, dividend shares could have a broader appeal than they have done in the past, with investors focused on capital returns potentially purchasing them. Their appeal is further enhanced because of the high valuations present among many growth stocks after the recent market rally. In comparison, dividend shares may offer wide margins of safety that translate into high returns.

Managing risk within an income portfolio

Despite their return potential, dividend shares are not without their risks. As with any company, they could experience further disruption from coronavirus. Meanwhile, an uncertain economic environment may create tough operating conditions for many businesses that ultimately lead to lower levels of sales growth and profitability.

Therefore, it remains important to diversify among income shares in 2021. Doing so could reduce overall risks, and allow for a broader range of opportunities to deliver impressive total returns in the long run.

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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Dividend Investing

Hand of a woman carrying a bag of money, representing the concept of saving money or earning dividends.
Dividend Investing

Buy these excellent ASX dividend stocks for a big income boost

Brokers think these stocks could be top picks for income investors.

Read more »

A smartly-dressed businesswoman walks outside while making a trade on her mobile phone.
Dividend Investing

Here's the Telstra dividend forecast through to 2028

Let's see where the telco giant's dividend could be heading.

Read more »

Woman smiling with her hands behind her back on her couch, symbolising passive income.
Dividend Investing

My ASX share portfolio's yield is 1.8%. Here's why I'm ok with that

A small dividend yield is not a bad thing.

Read more »

A happy male investor turns around on his chair to look at a friend while a laptop runs on his desk showing share price movements
Dividend Investing

Brokers name the ASX dividend shares to buy in June

Let's see what they are saying about these shares.

Read more »

Married elderly man and woman in love spending time together on bench on a phone, symbolising retirement.
Dividend Investing

Why I think these 2 ASX dividend stocks are top buys for retirees

These stocks offer investors a pleasing level of resilience and dividends.

Read more »

Man pointing an upward line on a bar graph symbolising a rising share price.
Dividend Investing

3 growing ASX dividend stocks to buy now

Analysts are expecting these stock to paying growing dividends.

Read more »

Man holding out $50 and $100 notes in his hands, symbolising ex dividend.
Dividend Investing

Where I'd invest $5,000 into ASX dividend shares right now

These two stocks look irresistible to me.

Read more »

Smiling business woman calculates tax at desk in office.
Dividend Investing

Turn tax return into passive income with these ASX dividend shares

These options can bring solid returns through passive income. 

Read more »