A tough time for dividend stocks
Let’s face it. Identifying stocks to buy and hold for decades rather than months or years can be difficult.
2023 in particular, year to date, has been a very tough time for many dividend stocks.
What does this mean for me?
What does this mean, for you, if you invest the same way?
A tough time for dividend stocks
It’s no secret to anyone that our world let alone the stocks we invest in, is under constant change.
Over the last couple of years, key markets look like this in Canada and the U.S.:
Source: Portfolio Visualizer.
Hardly good for any stomach.
But I’m reminded and comforted by the fact that like any improvement approach (and investing is similar), headaches or gains that don’t feel very good short-term often translate into massive improvements/gains over time – just as long as you stick to your program.
Source: The Behavior Gap.
With this in mind, it’s hard not to look at some beloved BTSX stocks year to date and be somewhat concerned.
Experts on dividend stocks
Some experts might remind us that a dividend payment from a large, profitable company with a leading market share in a stable or growing industry is about the closest thing to a guarantee a long-term investor can find in the market. In fact, dividends alone accounted for about 40% of total stock market returns from 1930 through mid-2022, according to Fidelity (no affiliation).
But history also tells us that not all stocks may perform equally well when consumer prices are rising, as in now. This makes buying, owning and adding to your personalized dividend portfolio, challenging…
A reminder you can gain exposure to dividend stocks in a few key ways:
1. Buy individual dividend-paying stocks. This is what I do, especially for Canada. In the past, I’ve looked at Board dividend policies, earnings per share (I still do!) and the company dividend payout ratio as key metrics to follow and be mindful of.
To diversify, I own stocks in many sectors as to avoid too much sector risk – but in Canada that’s hard to do.
Long-time subscribers will know I like and therefore own “TULF” stocks in Canada:
- “T” for telecommunication companies (e.g., Telus).
- “U” for utilities (think Fortis, Emera, Capital Power, Algonquin Power, Brookfield Renewable Partners, and others).
- “L” for low-yielding dividend growth stocks with growth potential (think Canadian National Railway, Waste Connections, Alimentation Couche-Tard, and others).
- “F” for financials (you know the names; big-5 banks to start with).
2. Buy index funds and low-cost ETFs. With indexing, there is minimal stock selection involved since you own a plethora of stocks (good and bad stocks) in a packaged fund for ideally a low-fee. Some strategies can tilt towards income but most focus on total return.
3. Buy actively managed funds. This is my least favourite option BTW. In today’s markets, professional managers may be able to identify companies that are likely to increase their dividends and avoid those likely to cut them. That active money management usually hits your pockets with higher costs or underperformance however since money managers need to put food on the table as well – they are paid to perform. A manager would need to be actively involved to understand if a company can raise its dividends faster than inflation, and so on. You pay for that money manager understanding whether things work out or not in the form of fees.
My approach to dividend stocks
Beyond just BTSX stocks, I own dividend-paying stocks because I believe in the long-term power generation of such companies.
If history is any guide, what has worked in the past should continue to work in the investing future.
“Dividends can be reflections of a company’s success story. Organizations that raise their dividend payout on a regular basis are telling us they are doing well now and are confident about their future. Sustainable dividends can also help investor behaviour – the investor avoids selling assets in any falling market.” – My Own Advisor
When you invest in stocks, dividend payers or not, you are seeking to earn returns and ideally sell your shares at a higher price than what you paid for them – creating your own dividend.
Dividend-paying stocks do something extra ─ they pay part of the company’s earnings to investors as dividend income (today) and offer up optionality to the shareholder.
You see, in a perfect world, all businesses would allocate capital in a way to perfectly maximize the return on that capital. This would be done so reinvested money would go back into the business in way that pays off immensely for the shareholder (by increasing returns over time AND by continually reducing the company’s tax burden). But you should know by now we don’t live in a perfect world. This means shareholders have over time demanded a dividend – for the purposes of “optionality”. Shareholders like optionality – and dividends provide that optionality – to give investors the choice to increase or decrease their exposure to the business. Reinvested dividends therefore, take advantage of that optionality, to increase exposure. Dividends taken as cash, do not.
Market conditions and company-specific activities can and will continue to influence whether dividends will be paid, reduced or increased. High-yields can be huge warning signs of a dividend cut. Those cuts can and do happen but such cuts are usually in the best interests of the company’s long-term viability. This is why dividends cannot be faked for very long.
As previously mentioned, dividends may also help investors at times when many stocks’ prices are down from their highs – including this year. Going back to the 1940s and 1970s, when inflation surged then, I recall reading that dividends accounted for something like 65% and 71% of the S&P 500’s return, respectively.
We know market history doesn’t always repeat but it can rhyme.
“In the 1970s, surging oil prices caused the most infamous period of American inflation. The market notched another positive return, but this time, a whopping 73% of the S&P 500’s returns came from dividends.” – Source.
A tough time for dividend stocks summary
Instead of picking and choosing dividend stocks, when in doubt, as always I say: index invest for total return.
Index investing works very well because you tend to beat most active money managers from the fund industry over long investing time horizons with this approach AND you can ride market-like returns in the process – whatever those returns may be; good, bad or indifferent.
In a recent Globe and Mail column (subscription), I read the following reminder:
“Despite a challenging environment, keep in mind that over the long run, dividends matter a lot, accounting for the lion’s share of equity returns,” Hugo Ste-Marie, a strategist at Scotia Capital, wrote in a report published last Wednesday.”
There is a power behind dividends as part of total returns but needless to say it’s been a very tough time for many dividend-paying stocks this year to date.
The stock market continues to penalize dividend payers but I don’t believe that pain will last forever. Many dividends will still get paid and prices will rise eventually for many companies too.
When all this happens is a huge wildcard, but I will be watching.
It will be interesting to see how our portfolio manages/navigates a higher-yield environment in the coming months and years. I will keep you posted on our progress. I hope you keep me posted on your portfolio too.
Let me know your thoughts, as always, in a comment below!