Is it a done deal?
The most reliable indicator of the past 50 years says it is.
The yield curve is the indicator, and it’s flashing red for the first time since 2007.
The yield curve is flashing recession.
The crimson light has many prognosticators predicting that we’ll be saying, “hello, recession,” in the next 12 to 18 months.
But will we also be saying, “hello, bear market”?
The odds favor we will.
Seven of the 11 bear markets (63.4%) since 1950 have preceded or followed a recession.
What’s more, we could be saying “hello, bear market,” first. Bear markets have been equally inclined to show up before a recession than during it.
And once in recession, all bear markets have experienced accelerated stock selling.
So, with the odds rising that bad things could happen sooner than later, what should we do with the stock portion of our investment portfolio?
I know what I’m doing: nothing.
I kid you not. Here’s the reason for my inertia: The stock portion of my investment portfolio is allocated all to dividend payers.
What I do with my dividends is a variable. I don’t spend them. I reinvest them in additional shares of existing holdings and new dividend-paying stocks.
The strategy is worth considering.
Jeremy Siegel, a Wharton School finance professor, has called reinvested dividends the “bear market protector” and the “return accelerator.” His logic is simple to understand: You’re able to buy more shares thanks to the lower share price. You increase your equity position in the company. You increase your dividend income.
Investors have fixated mostly on share-price appreciation since the current bull market left the gates in 2009. This is a mistake. Total return should always be the focus.
Dividends contribute greatly to total return. In some eras – the 1930 and 2000s, most notably – dividends were the only source of return because share-price appreciation was nowhere to be found (in the broad-market indexes).
Dividend-paying stocks can produce more exceptional returns. They can also produce more restful nights.
Dividend-paying stocks are less volatile than non-dividend-paying stocks. Based on volatility measures beta and standard deviation, dividend-paying stocks experience more sedate share-price swings compare to non-dividend payers.
All dividend payers are good. Some are better than others.
If you’re a dividend-stock investor, you want to ensure your portfolio contains dividend growers. They’re not only less volatile than all other stock categories, they produce the highest total return.
Data compiled by Ned Davis Research show dividend growers (and initiators) of the S&P 500 produced a 9.6% average annual total return over the past 46 years. They produced their superior returns with the least share-price volatility.
Dividend growers show their full mettle during late stages of a business cycle (such as now) and during the recessions that frequently follow.
S&P 500 dividend growers generated a 19.9% average total return 12 months before a recession compared to 5.6% for non-dividend payers.
During the recession, they produced an average loss of 5.5%. The S&P 500 and non-dividend payers in the S&P 500 produced losses of 9.3% and 21.4%, respectively.
Source: National Bureau of Economic Research and Ned Davis Research, and Nuveen
To be sure, bear markets and recessions are no Cancun beach vacation. But with the right perspective and the right dividend stocks, they needn’t be an extended session with the dentist either.