Will Dividend Investing Protect you more?
I will preface this article by stating I do a good bit of “Dividend Investing.” At the same time, it is not all I do.
One common argument by dividend investors is that by focusing on Dividends, you are more protected during a market correction, recession or bear market.
How has that technique faired in this Coronavirus Correction? Let’s take a look at some major ETF’s.
ITOT (Total Stock Market ETF containing 3633 holdings): It pays a distribution of 2.05% and is currently down 22.11% YTD.
NOBL (A Basket of 65 S&P Dividend Aristocrats): It pays a distribution of 2.13% and is currently down 24.54% YTD
DGRO (A basket of 477 Dividend Growers): It pays a distribution of 2.48% and is currently down 22.76% YTD.
If we do some quick math here and add back in the dividends we get a total return of the following, all numbers NEGATIVE (Yes, I realize that doesn’t take into account some factors over the next year but we have to work with knowable here)
ITOT 20.06%, NOBL 22.41%, DGRO 20.28%.
If you look at those numbers; NOBL is the worst performer, even taking into account the dividend. ITOT and DGRO are very close; DGRO paying a greater dividend.
ITOT holds the largest number of companies, followed by DGRO, followed by NOBL. I believe the greater diversification is part of the protection equation.
SECTOR exposure plays a big part here:
ITOT is 8.45% tech, 5.33% IT services
NOBL is 9.41% chemicals, 7.86% Household products
DGRO is 12.06% banks, 9.13% Pharmaceuticals
The lack of TECH exposure within NOBL is part of the reason it doesn’t perform as well poorer. DGRO has 4% Software and 3% Tech storage/hardware exposure and notice the better performance.
It turns out over the last 4 weeks, DGRO has fared slightly better than ITOT; NOBL is still behind. It remains to be seen how each will do over the next month or so.
Some other considerations when focusing on dividends:
LOTS of Dividends have been slashed during this Coronvirus Crash:
Here are just a few:
- Macy’s
- Occidental Petroleum
- Ford
- Darden Restaurants
- Nordstrom
- L Brands
- GAP
- Texas Roadhouse
- FCX
- Cracker Barrell
- Delta
- Boeing
- Marriot
- AMC
There are many on that list that NO ONE would have predicted would have to cut their dividend. For example, if you just looked at Delta’s payout ratio, you wouldn’t have thought it was at risk? Some of those companies have been paying dividends for DECADES.
Please keep this in mind: The risk of a DIVIDEND stock is compounded by the possibility of its dividend being cut/reduced. When the dividend is cut, it sells-off, causing the price to crash further. You not only lose the dividend but you lose the total return as well.
Furthermore, something that MANY Dividend Investors don’t realize. When that dividend is cut, a dividend-focused ETF has to remove it from it’s holding. Thus, there is more selling of the stock. Yet, another reason that even a dividend-focused ETF could present more risks. At the moment, I don’t know if any Dividend Aristocrats have had their dividends slashed or not.
I think before this is over, the Corona crash will prove that Dividend Investing is NOT innately safer. It has risks just like everything else. I say this as someone who has already had TWO dividend cuts (Darden Restaurants and Ryman Hospitality Properties). There is NOTHING wrong with Dividend Investing; however, I don’t think to focus solely on it or even heavily making that your deciding factor when investing is a smart idea, even during bear markets.
