There are very few sure things on Wall Street, but one is Wall Street’s history of creating too much of a good thing. Think back to the biotech IPO boom, the dot-com frenzy, and more recently mortgage related securities. Today everyone seems to jumping on to the dividend bandwagon. With baby boomers terrified that they won’t have enough income to fund their retirements, the trend is understandable. In the context of today’s low interest rate environment, the dividend story is compelling and history tells us that dividends are a significant component of equity investing returns.
The best scenario for dividend investors is for the economy to continue to bump along with the Federal Reserve keeping the liquidity spigot wide open. Should the economy materially weaken, dividend investors will need to start bracing for potential dividend cuts and or loss of principal. If the economy materially improves, investment momentum will likely shift away from stable dividend paying stocks to highflying growth stocks. Also, a material improvement in the economy would be accompanied by higher interest rates and investors may opt for more stable fixed income securities over common stock dividends.
Source: Business Inside
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