Why Dividend Stocks Shine In a Low Interest Rate Environment

Given the current market volatility, safer income-generating investments are increasingly being considered by smart investors who want to reduce their risk in the stock market.

There was a time not so long ago that investors looking for a sure thing would have T-bills and certificates of deposit (CDs) as their dominant investment tools for a safe, usually healthy return.

But that's not the case anymore.

Gone are the days that a retiree can rely on Social Security, Medicare, or a pension to pay for their retirement.

One of the problems is that the Federal Reserve continues to keep interest rates at all-time lows in an effort to encourage borrowing and to stimulate the U.S. economy after the recent recession of 2007 - 2009.

While this may help some businesses seeking capital for expansion and encourage consumer borrowing for cars and homes, the record low interest rates are having a negative effect on those who have saved wisely for their retirement.

The low interest rates continue to encourage consumers to borrow, and penalize those who have saved money over the years. With interest rates so low, investors can't get a decent return in the conventionally "safe" investments like a money market account, CD, or even U.S. Treasuries.

So dividend paying stocks have become an increasingly attractive option due to low interest rates.

The stronger companies in the S&P 500 offer an annual dividend in the 3 to 7 percent range. Not only will you have the usually consistent income from the cash dividends, but also you'll be an equity stakeholder.

Usually it's the better-performing companies that pay dividends, so it's likely that you'll enjoy capital gains with dividend paying stocks as well.

To be sure, a healthy dividend check is no guarantee that share price won't stagnate, but dividend-paying companies are less volatile than their growth-company counterparts and will move higher with the major market indices and with increases in their dividend payout.

Dividends are money in your pocket, sent to shareholders. There's no room for promises or accounting tricks. The dividend is paid, or it isn't. That's a rock-solid certainty you should be so lucky to find in all of your investments.

With the recent sell-off in stocks, there are many dividend stocks yielding well above 3 percent annually. In the large cap arena investors can look to Pfizer (NYSE: PFE) or Verizon (NYSE: VZ) and in the small cap arena check out Ituran Location and Control (Nasdaq: ITRN) and United Online (Nasdaq: UNTD) as places to start. There are other more growth oriented small caps that have smaller yields but more capital gains potential as well. 

As I wrote a few weeks ago, "...if you were buying stocks in the last three months, shouldn't you be buying now when they're a heck of a lot cheaper, and pay you more in the form of higher yields to own them? You don't need to buy all the stocks you'd like to own today, or tomorrow. But it would be 'risky' to not buy any at all."

Buy in tranches, a bit next week, some week after and maybe more in November.

This will average out your cost, and give you the security of knowing you don't have to pick 'the bottom' to cash in on great dividend paying small companies.

Disclosure: Author owns shares of PFE, VZ