Tuesday, October 21, 2008 0 comments ++[ CLICK TO COMMENT ]++

Dividend Investors Hit Hard

Focusing on dividend stocks works out in the long run (in terms of passive strategies) but dividend investors have been hit really hard over the last couple of years. The following chart plots a popular dividend-oriented ETF (DVY) against the S&P 500 (other ETFs, mutual funds, and indexes have similar returns.) Dividend payouts are not shown but I doubt that they can make up the capital losses in the last year or two.

Typically dividend stocks hold up in bear markets but that hasn't been the case this year. In fact the dividend ETF dropped far more than the S&P 500 in the early part of the year. The reason is fairly obvious in hindsight: the collapse of almost all financial companies. A lot of the big dividend payers over the last 25 years have been financials. Even if you had used a tough screen looking at consistent dividend payers that have been paying for 20+ years, with sold earnings growth, you wouldn't have avoided the losses.

In fact, this quarter is shaping up to be a once-in-50-years type of scenario:

Dividend payments by companies in the Standard & Poor's 500 Index may plunge 10 percent this quarter, the biggest decline since 1958, as bank failures and slowing economic growth stifle payouts, S&P said.

This is all the past and the long-run will likely be better for dividend stocks but it just goes to show how the bear has mauled almost everyone, including those purporting to follow a "safe" strategy. In fact, there is one remaining big risk for dividend investors: commodity businesses. Apart from financials, a huge chunk of the dividend issuers have been commodity businesses, such as oil&gas companies. If commodities enter a long-term correction (it's uncertain right now,) it's quite possible to see dividend investors hammered again; this time from yet another segment of payers that were considered safe and cash-flow rich...


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