The Class of Stocks That Buffer Portfolios in Times of Distress
One of the most overlooked areas of the market can offer ballast during rough waters.
I'm talking about dividend stocks.
You may think dividends are associated with retirees and those unfocused on capital appreciation… but you'd be wrong — way wrong.
After you consider the facts — you'll realize how important they are for the overall market and just about any portfolio… including times of heightened fear like now.
So, what's a dividend anyway? It's a share of profits that a company pays directly in the form of cash to its shareholders, typically quarterly.
Most of us are familiar with the long-term gains the stock market has generated over the decades. But did you know that reinvesting dividends makes a huge difference?
Below compares the growth of $100 invested in the market with and without dividends from 1994 — 2022.
It's not even close.
Starting around 2012, the compounding effects begin to pay off as the total return begins to accelerate. In this simple illustration, dividends reinvested turned $100 into $1,617 vs. only $948 without dividends:
That's a big difference!
Now that we know dividend investing is important and profitable, let's break down their place in the market going back nearly 100 years.
Since 1930, dividends have accounted for 41% of the S&P 500 returns. That's massive!
Once you bucket the market's annualized returns by decade, you'll notice (in green) how dividends represent a big chunk of the S&P's performance during weak periods.
Reinvesting during turbulent times has paid off. The 1930s, 1940s, 1970s, and 2000s are proof of the buffer they provide:
This brings me to today's environment with fear heightened due to government shutdowns, rising interest rates, surging fuel costs, and more.
The market's fear gauge, the CBOE Volatility Index (VIX), has ripped to 19, the highest reading in months:
Source: Yahoo Finance
While no one enjoys volatility in their portfolio, it's still part of the investing game. Turns out, holding dividend growth stocks while the VIX is rising tends to be a recipe to outperform.
Since 1990, the worse volatility gets, the better dividends hold up. When the VIX rises 20%+ in a month, dividend growers outperform non-dividend payers by 2.06%:
Dividend stocks offer a lot. Not only do they compound your investment over the long run, but they also boost portfolios when times get rocky.
And right now, plenty of high-quality dividend growth companies are on sale.
On a 1-year basis, the S&P 500 is up 19% and sports a yield of 1.58%. Compare that to the Consumer Staples sector (XLP) vastly underperforming with gains of +3.53%.
XLP's much more attractive yield sits at 2.55%.
Source: FactSet
Staples, while unpopular, will have better days. Chances are if volatility remains elevated, they'll mute some of the gyrations.
And when you peel back the onion on the staples group, you'll find some of the best brands in the world are there, such as The Coca-Cola Co. (KO) and Costco Wholesale Corp. (COST). I've owned the latter for many years… and it has been a juicy winner.
So, if you think there's no opportunity out there, think again. Start looking in the dividend growth patch.
Plenty of prior market leaders offer attractively growing yields and the potential to add ballast to your portfolio.
Dividends are a great way to increase your income, but they aren't the only way. At Quantum Edge Trader, Jason Bodner recommends stocks set for faster moves that subscribers can claim for quicker profits.
TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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