Two income-oriented strategies to protect and grow wealth in the market

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No matter what 2022 reveals, the time is always right to make smart, long-term investments to build wealth and protect what you have.

It's vital to have a strategy and disciplined approach — with an eye on the long term to allow for the power of compounding. Investing in high-quality dividend stocks and ETFs can help you achieve long-term high market performance and protect your investments.

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Dividend investing

One way to receive frequent cash payouts through equity investments is through businesses that pay regular dividends.

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A dividend stock pays a dividend either as cash or shares to stockholders. Companies distribute part of their profits monthly or quarterly to shareholders and then invest the remaining profits into the company to propel growth.

Far too often with investing, people prefer drama and publicized promotions over stocks that provide steady sales and a rising dividend yield.

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A company that provides regular payouts exercises fiscal discipline, which can take years. Historically, dividend-paying stocks are less risky and produce more income than other stocks do.

Companies that pay dividends need stable cash flow, with enough profits to meet obligations and debts while paying shareholders regular dividends. This is why high-quality, dividend-paying stocks tend to hold up better than non-dividend-paying stocks, even during market declines — they're stable and derived from highly profitable companies that have plenty of cash and long-term endurance.

Dividend stocks:

  • Are appealing for individual income-oriented investors because they offer the potential for share-price appreciation and the ability to receive profits through cash payments (i.e., dividends) without selling shares.
  • Tend to be more stable, while stock prices go up and down every day.
  • Offer cash as current income – important for baby boomers who are retiring in increasing numbers and need income to pay monthly bills and medical expenses.
  • Provide quarterly cash income like regular checks. Use the cash to pay utilities, rent or mortgage, grocery bills, and more. Dividend stocks with a higher yield (3+%, for example) provide more money to spend per month.

When you have a high-yielding, dividend-paying portfolio, you may generate enough cash flow to cover expenses without selling stock investments.

Selecting best-fit ETFs

There are more than 7,600 exchange-traded funds available, representing about $7.7 trillion – great odds to find ETFs that fit your needs.

It's important to choose a variety that spans industries and align with your investment outlook. If you're bullish on the U.S. economy, a fund of a cross-section of U.S. companies might be a good choice.

Explore these main ETFs:

SPDR S&P 500 ETF: The first and biggest ETF, it tracks the S&P 500 index, and is generally made up of the 500 largest publicly traded U.S. companies.

Invesco QQQ ETF: Tracks the largest companies (based on market capitalization) listed on the NASDAQ exchange. Since the NASDAQ includes a relatively high percentage of technology companies, this is a good way to diversify with computer, software, telecom, and biotech companies.

SPDR Dow Jones Industrial Average ETF: The Dow Jones Industrial Average is made up of 30 blue-chip stocks – this tracks those companies.

iShares Core S&P 500 ETF: Similar to the “spider” ETF, this fund tracks the S&P 500.

SPDR S&P Mid-Cap 400 ETF: This tracks the S&P Mid-Cap 400, made up of mid-size U.S. companies.

iShares Russell 2000 ETF: The Russell 2000 is a popular benchmark for small- to mid-cap companies (market values $20 million – $300 million). These companies turn over fairly regularly, but this is a popular way to invest in smaller companies.

iShares MSCI EAFE ETF: The Morgan Stanley Capital International and Europe, Australasia, and Far East ETF tracks the shares of non-U.S. companies in major world economies as a way to invest in foreign stocks.

Vanguard Total Stock Market ETF: Tracks the Wilshire 5000, the broadest index for U.S. stocks, including most U.S. companies. A good way to invest in the U.S. economy.

Consumer Staples Select Sector SPDR: Standard & Poors has established a variety of S&P 500 sector ETFs. This one tracks consumer services companies.

No matter your outlook, it makes sense to diversify. You might buy shares in a broad index fund, an international fund, and a commodities fund for protection from economic downturns or rapid drops in commodities prices. Your strategy should be disciplined, risk-aware, and seeking to add value in all market environments.

The key to building wealth is to maximize return while creatively minimizing risk. For new investors, buying ETF shares is a great diversifier to reduce single specific stock risk. And investing in companies that pay dividends … well, pays dividends.

By Kevin Simpson, founder and chief investment officer at Capital Wealth Planning

SIGN UP: Money 101 is an 8-week learning course to financial freedom, delivered weekly to your inbox. For the Spanish version Dinero 101, click here.

CHECK OUT: The 'old convention' for saving in retirement won't work anymore, expert says: Here's how to shift your strategy with Acorns+CNBC

Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.

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