Dividend Growth Investing: In a Volatile Market, Patience Pays Off
Stick with Dividend Growth Stocks
“If a company can keep paying you dividends and increasing them over time, you should be in no rush to sell.”
That’s what I told readers of Income Investors at the beginning of 2019. At that time, the U.S. stock market had just experienced its worst December since the Great Depression and the worst year in a decade.
Unsurprisingly, almost everyone was selling. And that’s when I urged fellow income investors not to come to that bearish conclusion so quickly.
As a matter of fact, I even said that “because stocks had gotten too expensive during the rally over the last several years, the recent pullback could represent an opportunity for value-conscious investors.”
I hope you took advantage of that piece, because while the U.S. stock market ended 2018 on a rather bad note, it has made a strong comeback so far into 2019.
Consider this: in the fourth quarter of 2018, the S&P 500 Index plunged 14%. Then, in the first quarter of 2018, the same benchmark index surged 13%. And by the time of this writing, the S&P 500 Index, the Dow Jones Industrial Average, and the Nasdaq Composite have all bounced back to around the same level as they were before last year’s sell-off.
Obviously, investors who picked up stocks on the floor during the height of the sell-off have made some decent profits.
Note that I’m not talking about some sort of “buy low, sell high” strategy. Despite the fact that I like making a buck from short-term capital gains as much as the next guy, nobody can time the markets perfectly.
In fact, when I told investors to be “in no rush to sell” and to take advantage of “the recent pullback,” I wasn’t referring to just any stock. I was talking about companies that “can keep paying you dividends and increasing them over time.”
And that’s really the key to making money from stocks with certainty. We know that “Mr. Market” is highly unpredictable. It’s nice that U.S. equities made a strong comeback, but it could very well be the case that the downturn lasts for another quarter or two. And sometimes, what we thought was the bottom turned out to be not the case. That is, you could try to “buy low, sell high” and end up at “buy low, sell lower.”
That’s why I’ve been urging investors to stick with solid dividend growth stocks. When a company declares a dividend, it’s a decision that’s independent of what the market feels like on that day. Therefore, if your goal is to collect cash dividends—which is likely the case if you are an income investor—a company that can pay you increasing dividends will allow you to worry less about market volatility.
In other words, if an investor owns a portfolio of stocks that can keep raising their payout through thick and thin, they can simply sit back, relax, and enjoy the steadily increasing dividend checks rolling in.
Note that I haven’t said anything about these companies’ share prices. That’s because despite their appeal to income investors, dividend growth stocks are, at the end of the day, still tickers that are subject to “Mr. Market’s” emotions. Therefore, in a market crash, even the most solid dividend growth stocks could see their share price tumbling.
Over the long term, though, sticking with companies that raise their dividends could lead to big paydays. According to data from Ned Davis Research, dividend-paying stocks in the S&P 500 Index have significantly performed non-dividend paying ones from 1972 to 2017. Moreover, stocks that grew their dividends during this period delivered the highest returns. (Source: “The Power of Dividends,” Hartford Funds, last accessed April 12, 2019.)
As we head into a new earnings season, volatility could make a comeback. Therefore, it’s a good time to remind ourselves that in volatile times, patience pays for dividend growth investors.