The number of stocks immune to this market’s poison has been shrinking every day, with biotech the latest sector to get picked off.
We advise selling your weakest positions in this environment, preserving your capital and reducing your risk. We’ve been raising cash since June, and adding conservative investments including fixed income positions.
However, we’re still holding over a dozen positions that we believe can weather the downturn while continuing to pay dividends. Our confidence comes from the historical returns of dividend-paying stocks during troubled markets.
During the 2008 crash, the S&P 500 declined around 37%, but S&P’s Dividend Aristocrats Index (a list of over 50 companies that have increased their dividends every year for 25 years) fell only 22%.
That’s a big difference when you consider the recovery from each of those declines: the Dividend Aristocrats Index had to rise 28% to reach its former peak, while the S&P 500 faced a climb of over 58% before it got back to breakeven.
2008 was just the latest instance in which dividend payers proved their value during market downturns. Since 1927, dividend-paying stocks have displayed meaningfully lower standard deviations that non-dividend payers in nearly every year, meaning that they are less volatile than the market overall (18.3% standard deviation from 1927-2014, compared to 30.1% for non-dividend-payers).
Coupled with dividend payers’ better long-term performance (10.4% annual return since 1927, vs. 8.5% for non-dividend-payers), this makes us comfortable holding high-quality dividend payers through even an extended bear market.
For example, lost 30% from the 2007 market peak to the 2009 trough. A growth investor would have sold. But the company never cut its dividend. In fact, it raised its dividend on schedule in 2008 and 2009. And the blue chip recovered its 30% hit by the end of 2010, and has continued to thrive since.
Not every investor has a long enough time horizon to remain invested during downturns. If you think you may face significant near-term cash needs, a larger cash position will likely be more appropriate for you. But for investors living comfortably off the dividend income from their portfolios, remaining invested in high-quality dividend paying stocks through downturns is a solid long-term strategy.
The dividends of the highest quality stocks are rarely affected by market downturns. As we wrote, the Dividend Aristocrats, for example, have all increased their dividends every year for 25 years or more, encompassing three recessions and two bear markets.
Remaining invested in high-quality dividend paying stocks means your investments will continue to reward you even during bear markets. That’s a benefit that should not be underestimated. Over the past 80 years, between 30% and 40% of stocks’ total returns have come from dividends, not price appreciation. Morningstar has crunched the numbers going back to 1927 to show that dividend income accounts for 41% of the annualized total return from large-cap stocks, 35% of the total return from mid-cap stocks and 31% from small-cap stocks.
For investors who rely on regular income from their investments, high-quality dividend payers are the best vehicle for maintaining a steady income during troubled times in the market. They lose less of their value during corrections, they’re less volatile overall and they keep paying you regardless of what prices are doing.
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