Why I’d buy and hold cheap dividend stocks in 2021

Cheap dividend stocks could offer a potent mix of a generous passive income and capital growth potential in 2021.

Their low price levels may mean that they offer high yields relative to other income-producing assets. In an era of low interest rates, this may make them more attractive to investors. The end result could be share price growth.

Furthermore, the potential for an economic recovery means that dividend shares may benefit from improving investor sentiment and stronger operating conditions. As such, they could deliver impressive total returns in 2021 and in the coming years.

The relative appeal of cheap dividend stocks

Cheap dividend stocks could have significant appeal in 2021 relative to other income-producing assets. Their low prices after the 2020 stock market crash means that, in many cases, they offer dividend yields that are above their long-term averages. As a result, they offer a far more generous passive income than other mainstream assets.

For example, cash and bonds have low income returns at the present time because of a loose monetary policy. With the global economic outlook continuing to be uncertain, it seems unlikely that there will be a substantial increase in interest rates before the end of the year. This could hold back the return profiles of cash and bonds.

Meanwhile, property price growth over the past decade means that the yields on investment property are relatively unattractive compared to many dividend shares.

The high passive income on offer from cheap dividend stocks means that investor demand for them could increase significantly. This may drive their prices higher, which would benefit investors through improving capital returns over the long run.

Dividend growth in a recovering economy

While cheap dividend stocks offer a relatively generous income return today, they could deliver strong growth in shareholder payouts in the coming years. The world economy is widely expected to recover from its 2020 woes over the next few years. Its strong track record of recovery suggests that this may prompt improving operating conditions for many dividend stocks that means they can afford rising shareholder payments.

As such, the passive income potential of dividend stocks appears to be high. At a time when higher inflation could become a reality due to a prolonged period of low interest rates and quantitative easing across many major economies, the high dividend growth rates that may be available on cheap dividend stocks could make them increasingly attractive.

Buying and holding a diverse range of dividend shares

Of course, it is crucial to buy and hold a diverse range of cheap dividend stocks. Some sectors and regions may continue to struggle in 2021 due to ongoing challenges such as political instability in Europe and the ongoing coronavirus pandemic.

Therefore, a portfolio that contains a broad range of stocks could be less risky than a concentrated group of holdings. Over time, it could deliver a higher passive income and stronger dividend growth.

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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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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