| | | I guess I have too much time on my hands.
I consider myself to be a dividend growth investor. I invest in what I perceive to be high-quality companies with a good historical record of increasing their dividends. I am NOT a high-yield investor. I started my DGI around 2013, preretirement, when I got out of my aggressive growth stocks and "looked into" the 4% "rule." I came to the conclusion, on my own, that since I would trust a 3% or 3&1/2% "rule" more, I should be able to achieve that income stream via DGI without the need to ever liquidate my portfolio. That being said, I feel I have absolutely "no dog in this debate." I seek a better understanding of the variability of dividend income compared to stock prices.
I decided to examine the behavior of both during three periods: The Great Depression (with various dates; 1929-1934 or 1929-1939, which I prefer); the 1973-74 bear market; and the financial crisis bear market of 2007-09. I was not able to find real good data for the Great Depression, but I used data from the NYU Stern School for the second and third periods.
The Great Depression saw a peak-to-trough decline in stock prices of approximately 90%. As I suggested, I did not trust the dividend data I found, but it appears dividends declined between 40% and 70%, though keep in mind that this was a period of sharp deflation.
The 1973-74 bear market saw a price decline of 48% to 50%. Dividends appeared to rise about 17% to 19% during the bear market, which was about even with or slightly less than the rate of inflation.
The financial crisis saw the S&P decline about 56%, depending on exactly how you calculate. Broad-based dividend number seemed to indicate a decline of about 22% from absolute peak to absolute trough (monthly--although I would like some verification of these numbers, and would prefer annual results).
EDIT: About 15%-16% two-year decline based on VFINX payouts.
Overall, I think it's safe to conclude that, based on our economic history, dividends decline much less than stock prices during periods of economic and financial market distress, with the caveat that very severe and protracted downturns still pose a significant income risk.
More importantly for me personally--and perhaps for most DGI investors, is what is likely to happen NOT to a broad index, but to the stocks in which you actually invest. To that end, I looked at all the approximately 15 stocks in my DGI portfolio and calculated their two-year dividend change from 2007 to 2009. An equally weighted portfolio (which I did not own at the time) increased its dividends 23% in that interval, or about 11% annually. My more heavily weighted positions did better than average, so my actual results would have been a percentage point or so better. Only one stock in my portfolio, Pfizer, cut its dividend during the financial crisis, though that was due to their takeover of Wyeth. In the interest of some disclosure, my main holdings are stocks like JNJ, MCD, LMT, and WEC. My more "doggy" holding are SON, maybe T, and MMM.
What will happen this time around? I don't know, and it certainly depends on how widespread and lingering the virus turns out to be. For my porftolio, I will plan for a 10% or 20% decline (possibly more, but that's not my planning strategy) in dividend income if the pandemic lingers domestically into late this year, for example. If we have a multiple year economic downturn, I have no specific "forecast." Even though I am planning for a 10%-20% decline, I do not expect it will be that great, though certainly a possibility. So far this year, I have had no cuts and even one increase--MMM, of all the suspects.
Thanks to all if you have read this far. Good luck everybody. Hope this helps the discussion.
One addendum: I have to get this off my chest. On another investment board I follow, several people are complaining vociferously that their earlier-in-the-year 9%-yielding mReits have cut their distributions 90% or 100%. While I am truly sympathetic to their pain, I want to ask them "Do you know what risk is? Do you think that you are so much smarter than many of us in that you can find low-risk 9% while the rest of us are only able to luck into a JNJ?" I really don't mean to be unsympathetic, but really people, understand what you are buying. There. Whew! |
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