Looking for investment strategies to address volatility? Learn how Millionaires are coping with market uncertainty and price swings.
Dividend stocks are one of the top investments strategies used by Millionaires to cope with market uncertainty and volatility, according to a Millionaire Corner survey conducted in June.
More than 40 percent of investors with a net worth of $1 million or more (not including primary residence) said they are most likely to invest dividend stocks in an increasingly volatile market. Ranking second among investment strategies for volatility is building up cash reserves at FDIC-insured banks (15 percent).
Money market mutual funds and municipal bonds are the third and fourth most preferred investment strategies for volatility, with roughly 11 percent of Millionaires most likely to select either of these products despite current low interest rates. Least popular are foreign bonds with high credit ratings (less than 1 percent), high yield bonds (3.7 percent) and Treasury bonds (3.9 percent).
Dividend stocks already play an important role in the investment strategies of Millionaires. Nearly all Millionaires receive income from dividend paying stocks, and expect dividends to provide up to one-third of their income in retirement, according to a study conducted by Millionaire Corner in the fourth quarter of 2011.
Dividends allow a company to distribute profits to shareholders. The payments, typically made on a quarterly basis, can help reduce investment uncertainty. (Dividend payouts surged in the first quarter of 2011.) Some investors chose to reinvest dividends, a strategy that allows them to build up holdings without taking money out of other investments.
Dividends also appeal to individuals seeking investment strategies to address prevailing low interest rates, though the tactic poses greater risk than many fixed-income products. Not only can dividend stocks fall in value, but a company can reduce or eliminate dividends in lean times. (Learn more about the pros and cons of investing in dividend stocks.)
Dividend stocks receive special tax treatment, another reason for their popularity with affluent investors, but the tax advantage may be short lived. Taxes on dividend income are currently capped at 15 percent, but the cap is set to expire at the end of 2012. Under rules proposed in President Obama’s 2013 budget taxes on dividend income could go up to 43.4 percent for tax payers in the highest bracket.
Less affluent investors are much less likely than Millionaires to invest dividend stocks in volatile times. They favor gold (30 percent), money market funds (26 percent), and FDIC-insured products (18 percent) as their top three investment strategies to address volatility.