Question

Investors often seek alpha return using various cutting edge investment strategy. Some of the approaches such as value investing has yielded superior return in the past, however it hasn’t been the case since post 2008. Technology companies has consistently outperformed high cash flow companies over the past 12 years. Extrapolate with sound rationale of how equity investors can consistently achieve superior return in 500 words.

Answer 1

If you need higher returns, including some potential for growth, you will need to look for assets that provide a comfortable balance of high return and low risk. Low risk means that there is a reduced chance of losing your principal, but one that may be offset by a higher return than you will get from investments that are completely risk-free.

Fortunately, there are more than a few worthwhile investments that qualify as high return and low risk. Not only will that enable your investments to grow on a tax-deferred basis, but when the time comes to begin making withdrawals, you can receive them on a tax-free basis.

Dividend-Paying Stocks

There are plenty of companies that pay dividend yields that are much higher than what you can get on completely risk-free investments.

    Dividend-paying stocks also have one major advantage over risk-free investments, in that they enable you to participate in capital gains. That's in addition to the dividend income that you receive. Though they may bounce some in the short run, the combination of dividend income and capital gains can provide impressive long-term investment results.

Dividend-paying stocks are not totally risk-free, of course, but they tend to be far less risky than other stocks. Part of that is because they tend to be better known, better established companies. Not only have they been around longer than most other companies, but they also usually have a long history of paying dividends.

High dividends also provide a strong measure of protection from price fluctuations during bear markets. While the market may hammer growth stocks, dividend stocks are less vulnerable to deep declines precisely because of the dividend. That's at least partially because dividend paying stocks become more popular with investors during bear markets, since capital gains are harder to come by.

    In addition, a generous dividend makes it easier for an investor to hold a stock through a declining market. After all, the investor is receiving regular cash flow from the dividend, often at a rate that’s higher than what can be earned on completely risk-free investments. Also, as bear markets drop stock prices in general, the yield on a dividend stock goes up. That makes the stock more attractive to new investors, and can make dividend-paying stocks among the best performers early in a new bull market.