Buying income stocks after the market crash could produce relatively high dividend returns. It may also lead to impressive total returns in the long run.
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The 2020 stock market crash has caused many income stocks to offer higher yields. This could not only improve their appeal among dividend investors. It may also make them attractive to long-term growth investors due to reinvested dividends making up a large portion of the stock market’s past total returns.
As such, now could be the right time to build an income portfolio. It could outperform other assets and lead to an improvement in your financial situation.
High dividend yields among income stocks
Following the COVID-19-led stock market crash, many income stocks now offer high dividend yields. Their low prices and maintained shareholder payouts mean that, in some cases, they offer income returns that are significantly higher than their historic averages.
As a result, they could offer an impressive income return in an era where low interest rates look set to remain in place for a prolonged period. This could cause increasing demand among investors for those dividend shares that offer a reliable above-inflation return. This may prompt higher prices for dividend shares that produces impressive capital returns alongside their income prospects.
Even though some income stocks have cut their dividends since the start of the year, it is still possible to build a diverse portfolio of dividend stocks. Over time, it could produce a surprisingly high level of total returns.
A lack of income opportunities elsewhere
Another reason to purchase income stocks today is the lack of opportunities available elsewhere. An investor who is seeking to make a generous income return from their capital now has limited choice as a result of low interest rates. Cash and investment-grade bonds, for example, offer returns that are lower than inflation in some cases. This could lead to a loss of spending power over the long run that negatively impacts on your financial outlook.
Meanwhile, other assets such as property may lack the high yields that are available in the stock market due to house price growth over the past decade. Therefore, buying dividend stocks could be one of the few ways to generate an inflation-beating income that grows over the coming years.
Total return potential
Income stocks are not only appealing to those investors who are seeking to live off payouts from their holdings. A large proportion of the stock market’s past total returns have been derived from the reinvestment of dividends. Therefore, investors who are seeking to generate capital growth from their portfolio over the long run could buy a range of income shares in order to generate rising capital values over the coming years.
At a time when some growth stocks are overvalued, this could be a sound means of building a nest egg. It could lead to you enjoying a generous passive income in older age.
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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. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.