Stocks that pay dividends and the mutual funds that invest in them may see a perfect storm of positivity in 2013. Here are 6 reasons why dividend funds may be a wise investment move in the next year:
- Bond yields are extremely low: Income investors are having a hard time accepting the current low yield environment. With the 10-year treasury yielding around 1.6%, stocks and dividend mutual funds look more attractive.
- Demand for dividends can push prices higher: Large and cash-rich companies like Apple know they can attract more investors, and thus more capital, by offering dividends and by slowly increasing them over time. This is classic supply and demand. With bond yields low, corporations know they can attract investors by pushing dividend yields to the 2% range.
- Recession fears could push value stocks higher: In the Value vs Growth investing comparison, value stocks (many of which pay dividends) tend to perform better than growth during recessionary periods. We enter 2013 with much economic uncertainty and an aging bull market that will turn 4 years old March 9, 2013 (3.5 years is the average duration).
- Aging population will continue to push demand for dividends: It's an old idea (forgive the pun) but the baby boom generation does make a difference because it represents the largest portion of the US age demographic. The greatest concentration of boomers are in their 60's now. So they are either retired now or will be in retirement soon.
- Dividend-paying sectors could return to favor: Two of the highest paying dividend sectors, Real Estate and Utilities, could see a rise in demand in 2013. Real Estate is gaining favor now because of a perceived bottom in housing, higher confidence in building, and continued demand for rents. Utilities are a popular defensive play when investors think
- Momentum trading: All of the above have overlaps in cause and effect and can combine to make dividend funds the "place to be" in 2013: Buying can create more buying, which often creates more buying, and so on. Nothing attracts a crowd like a crowd.
For a big picture view of asset allocation and investment ideas, see my 2013 Mutual Funds Portfolio Guide.