When you own stocks, you should typically own dividend payers either individually or through exchange-traded funds (ETFs). The risks of stock ownership do not disappear with dividend stocks and there is obviously risk of substantial loss of principal, a dividend cut, or elimination. But, when weighing the risks, it certainly makes sense to put the odds in your favor and own consistent dividend payers. The dividend is pretty much all you can count on as far as a return, and even then, it’s no guarantee. Still, throughout history dividend payers have provided attractive total returns (dividends + capital gains) and often exhibit less volatility than the market itself.

Dividends can be a sign of quality. Companies that have paid dividends for decades are generally in strong financial shape. They generate a lot of cash and have predictable earnings.

Dividend stocks are an attractive investment option for pre-retirees and retirees in need of a consistent income stream with moderate growth potential.

Instead of employing a passive buy-and-hold approach that is likely to suffer deep losses during a bear market, Stuart Chaussée & Associates, Inc. adheres to a risk-focused, dividend-income approach to managing a stock portfolio.

As valuations increase during a bull market, stock exposure should be reduced to control risk with the goal of having limited exposure to stocks during a bear market or bubble environment. This approach, if used successfully, can also allow you to still participate in the upside during bull markets, but not sit passively and watch your profits evaporate during declining markets.

The objective is to capture as much of a bull market advance as possible while reducing risk as valuations rise. Ideally, stock exposure would be reduced to 20% or less if valuations clearly indicate stocks are well into bubble territory and risks are elevated.

Note, an attractive alternative to a buy-and-hold dividend stock portfolio is to own a portfolio of Buffer ETFs that provides upside participation in the market with built-in downside protection. Downside protection is obviously critical during declining markets. See the various sections on Buffer ETFs on this website for more information.

Real estate is an asset class that investors can use to further diversify that provides plenty of upside growth potential and income too. The easiest way to gain access to real estate, without having to become a property owner outright and manage and maintain buildings, is through real estate investment trusts (REITs). REITs trade like stocks on major U.S. exchanges and the asset class includes rental real estate, office buildings, malls etc.

REITs have historically provided investors with attractive dividend income, competitive performance, transparency, liquidity, inflation protection, and portfolio diversification.

REITs are required to distribute at least 90 percent of their taxable income to shareholders annually in the form of dividends. The industry’s dividend yields historically have produced a steady stream of income through a variety of market conditions.

In short, REITs have demonstrated a historical track record of providing a high level of income combined with long-term share price appreciation, inflation protection, and prudent diversification.

REITs, like stocks, can become overvalued and subsequently suffer deep declines of 20% or more. In addition, during difficult markets, REIT prices can become highly correlated to stocks so they don’t always offer much diversification of risk. Sure, some will argue, as with dividend stocks, that the income provided by REITs offers some downside protection, but the annual income is not sufficient enough to make up for price declines during bear markets. Consider a portfolio of REITs that provides annual income of 3%. If prices decline 30% or more during an average bear market, it could take 10 years of income to recoup losses.

As with all asset classes, it’s important to focus on managing risk in a REIT portfolio, with the objective of attractive risk-adjusted returns over a full market cycle.

Bonds are issued by governments and corporations when they want to raise money. By buying a bond, you’re giving the issuer a loan, and they agree to pay you back the face value of the loan on a specific date, and to pay you periodic interest payments along the way, usually twice a year.

Unlike stocks, bonds issued by companies give you no ownership rights. So you don’t necessarily benefit from the company’s growth, but you won’t see as much impact when the company isn’t doing as well, either—as long as it still has the resources to stay current on its loans.

Bonds give you two potential benefits when you hold them as part of your portfolio: They give you a stream of income, and they offset some of the volatility you might see from owning stocks.

While bonds are typically not an investment vehicle of choice for outpacing inflation, there are times when investing in bonds can be very attractive.

Typically, when we construct a portfolio of individual bonds we intend to hold the bonds until maturity. However, if yields have decreased significantly and bonds are trading at a high premium over par, we may consider taking profits and reinvesting the proceeds elsewhere. But, in general, the bond allocation in a portfolio should be considered as a long-term holding.

Note, for bond funds and bond ETFs, since there is no effective maturity date, greater care should be paid to pricing while holding bonds in these structures. Since bond mutual funds and ETFs do not have a maturity date, more active management may be appropriate.