Investing in dividend stocks is a great way to hedge yourself against volatility. Penny shares are inherently volatile. These small companies can shoot up, or crash down 10%, 20% or even 30% in a single day.
Owning stocks that pay dividends, especially BIG dividends, means you get some downside protection. Because even if a stock drops in price – if it pays you a dividend that’s cash in your pocket.
Dividends are historically less volatile than most shares
When we look back in time, dividends have proved to be historically less volatile. From 1900 through to 2018, the first half of the 20th century saw several peaks and valleys in dividend growth, exacerbated by the Great Depression and the two World Wars. Other than these significant macroeconomic events, the market’s dividend growth rate held steady between -10% and +10% over time. Over the same period –stocks were DOUBLE as volatile as the change in dividends.
So, what happens to dividends in a bear market?
As you can see from this table – there’s actually very little correlation between dividends and a bear market.
In fact, taking all these bear markets into account over the period dividends only decreased by 2% on average during a bear market. At the same time shares crashed around 32%.
Simply put – if you buy a share that’s a big dividend payer before a crisis it is likely the company will be able to continue paying you the dividend irrespective of the crisis, or bear market.
The exception, however was the lockdown that happened due to Covid – as these caused companies to have ZERO income – it is the only time in the history of the stock market that we have seen this happen.
Why dividends are less influenced by market movement
It may seem counter-intuitive at first but remember a dividend is a commitment made by a company to its shareholders. Cutting dividends is one of the last things a company wants to do as it may (1) signal financial distress and (2) disappoint shareholders. So even if stock prices are falling, companies will still try and maintain the company’s dividend if it does not threaten their ability to survive.
Plus, companies that offer dividends are often more established with stable sales, earnings, and cash flow over time. And since dividends are meant to be paid out of profit, dividends should represent excess earnings that aren’t immediately needed to grow the business.
The benefit of relying on dividends in a bear market
When the markets are down, dividends give you the ability to continue generating income without having to worry about selling your investment. That’s how you lose money.
When stock prices are all over the board, the mature, stable companies who pay dividends have adequate cash flow and excess reserves to fulfill their dividend payouts, and your nest egg remains untouched, free to grow and compound over time.
You can’t predict a bear market, nor can you anticipate how long a down market will last. You can, however, position your retirement portfolio to weather the ups and downs with a high level of confidence that you won’t sacrifice your retirement income.
Our favourite JSE dividend payers can be found in this report: Retire Rich with Dividends. For the next 24 hours we are giving 100 online copies away free-Get the details here.
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