For the past few years, it seems everyone loves dividend stocks .  Dividend stocks and dividend mutual funds seem to be such a standard staple when it comes to investing and when you look at the past long term performance, one can argue the popularity is justified.

Reasons for dividend stocks

For past 20 years I have been a strong advocate of dividend stocks because they include some of the biggest, most stable companies.  Companies that pay dividends means they make profits and as a conservative investor, I have always been a believer that if you invest in a company, the safest thing to invest in is a company that has consistent profits.  I consider dividend paying stocks a core holding in an investment strategy I have preached for quite some time – CORE and EXPLORE.

I asked Dan Bortolotti, The Canadian Couch Potato about some of his favourite dividend investments and he referred me to this great article on Choosing a Dividend ETF .

Two reasons to be cautious

Despite the strong long-term track record of dividend paying investments, there might be a couple of short term reasons for caution:

1. The herd is big. I’ve always tended to be a bit of a contrarian.  When everyone is interested in the same thing, it always concerns me. My research has always led me to believe that chasing performance is the worst investment strategy to practice. It’s easy for me to be contrarian on something cyclical like Gold which is a hot topic today but dividend stocks have been such a sound long-term investment that most people don’t look at it as a trend.  The popularity still scares me and makes me wonder if dividend stocks are overvalued and a cycle is ready for change.
2. Valuations. You can have a great investment but if the valuations are high, then you can still overpay for good investments.  When there are more buyers than seller then the price tends to go up and this popularity can make good sound investments overvalued.

I’m not smart enough to predict the future of the markets .  When everyone is strumming the same tune, I tend to be a little skeptical.  This is a tough issue for me because history and fundamentals will suggest that dividend-paying stocks will always be good core holdings in a portfolio.

Long term, I will still bet on dividends as a solid core holding but in the short term, I wonder if it is a good time to take some profits off the table.  It may be a good time to rebalance the portfolio especially for many buy and hold investors. I’ve seen a number of people where the dividend equity part of their portfolio has grown to be a large significant holding.  Emotional thinking says to keep your winners and sell your losers.  Logical thinking suggests that you do the opposite.

I can’t help but wonder if growth stocks will become the next trend again like it was in the 1990’s?  Some might argue that this trend has it already started with the emerging market rebound .  I believe everything goes in cycles but when will those cycles happen is really tough to predict.

When predicting the future, I’ve been both right and wrong.  I’d love to hear your thoughts about dividend investments and your successes and failures.