Is This The Buying Opportunity of the Year?
The Best Stocks to Buy Right Now
A Dividend Aristocrat in My Portfolio
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“Buy when there’s blood in the streets,” is a graphic but clever piece of investment advice credited to Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family. The full quote is used less often, but goes: “Buy when there’s blood in the streets, even if the blood is your own.”
Investors love a bargain, and buying cheap stocks after a big haircut can be wickedly profitable. But they also know how painful it can be to be early—or late.
Investors who bought BP two months after the Deepwater Horizon explosion—right at the bottom—found themselves sitting on a tidy 53% profit just five weeks later, in early August. But you had to have the timing just right to make out that well.
Investors who jumped on board a month after the disaster found themselves 40% in the hole a month later, and bargain hunters who bought just a little too late—in August—found themselves poorer a year later, and would be sitting on a 20% to 25% loss today.
Today’s market is certainly not pretty, but it’s not clear that we’re at the blood-in-the-streets bottom yet either. Investment professionals are have turned quite conservative; the latest BofA Merrill Lynch Global Fund Manager Survey found them sitting on average cash balances of 5.5%, that may seem low but it’s the same level as during the 2008 crisis.
But individual investors aren’t quite so pessimistic yet. In the latest AAII (American Association of Individual Investors) Sentiment Survey, 32.1% of respondents still said they were bullish and only 28.7% have turned bearish, still below the long-term average bear reading of 30%.
Which is all to say, if you’re thinking about doing some bargain hunting today, be careful.
In fact, for investors with cash burning a hole in their pocket, I’d suggest picking up some high-quality dividend-paying stocks instead. If that seems counterintuitive, let me explain.
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 episode in which dividend payers proved their value during market downturns.
Since 1927, dividend-paying stocks have displayed meaningfully lower standard deviations than 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).
In addition, dividend payers deliver better long-term performance: since 1927, dividend-paying stocks have returned 10.4% per year on average, compared to 8.5% for non-dividend-payers. When you lose less during downturns, you can do a lot better overall.
For example, Coca-Cola (KO) 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. The Dividend Aristocrats, for example, have all increased their dividends every year for 25 years or more, through three recessions and two bear markets.
Remaining invested in these kinds of 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 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. And since 2004, the Dow’s price has risen 65%, but with dividends, the index delivered a total return of 114%.
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.
Dividend Aristocrat Consolidated Edison (ED) is one of my Cabot Dividend Investor holdings. I recommended the stock in February 2014 and it’s provided a 29% return since then, including a 4.8% dividend yield on cost. Here’s what I wrote to my subscribers about the stock in my update yesterday:
“Consolidated Edison (ED 66 – yield 3.9%) – A flight to safety and the deferral of rate hikes have propelled ConEd through a full recovery of August’s losses. The latest delay in rate hikes and the scary market environment could even lead to a short-term utility rally over the next couple of months. ED is a Hold for safe income investors.”
If you’re a dividend investor or want to be, I urge you to check out Cabot Dividend Investor. This conservative advisory includes a three tiered income approach for investors seeking income now or income in retirement. Click here to order.
Your guide to a secure retirement,
Chloe Lutts Jensen,
Chief Analyst, Cabot Dividend Investor
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