Dividend investing in a bear market–more nonsense revealed

Long-always investment advisors, brokers, planners and most fund managers are paid most when they keep their clients holding equities. Moving out of equities is financially detrimental for the advisor/managers. For this reason the money business has grown to adopt a religious zeal for the idea of constant equity allocations. When the economic climate begins to contract and stock markets begin their predictable decline, this presents an inconvenient annoyance for the buy and holders. Clients start reacting badly, and sales managers and head office start peppering the advisors with materials on how to keep their clients in “the market”: “Communicate! call your clients, hold their hand. Tell them to stay the course, but don’t let them sell!”

I ran into my carpenter on the street a couple of weeks ago outside of his bank. He told me he had just been in to see his financial advisor and had asked that he sell some of his equity mutual funds to raise some cash and protect himself from the current bear market. “She told me, no, ” he said, “she said she was too busy to see me today anyway but that I could not sell.” Here he was standing outside on the curb like a child who had been chastised. His gut instinct had been to protect his savings, but the “expert” had shut him down. I felt bad for this hard-working man, “just whose money is it” I asked him.

I have heard this same story for months now. Far from getting any pro-active advice from their advisor or manager, those who seek to protect their capital, usually have to go through a series of uncomfortable, even confrontational meetings to get their instructions followed. It is sickening and underlines why most money types are working for themselves and their firms, much more than for their clients.

Most often the only solution offered for defence in a bear market is the idea of buying dividend paying stocks.  But here is the truth:  dividend paying stocks do not protect capital from a bear market.  Dividend paying stocks fall less, but they still fall in value a lot.  This article from James Bianco of Bianco Research explains the facts well:  Dividend Investing (via The Big Picture).

Here is a picture of what dividend stock out-performance looked like during the 2007-2009 bear market, dividend paying stocks returned -35.74% versus -46.10% for the S&P Equal Weight Index.

Here is the picture of what dividend stocks have done year to date versus the overall market:  on an annualized basis dividend stocks have returned -18.34% versus -34.30% for the S&P Equal Weight Index. 

Is this your idea of capital protection?

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7 Responses to Dividend investing in a bear market–more nonsense revealed

  1. I understand what you are saying, but as a someone who became a do-it-yourselfer investor, what hope do I have of correctly timing in a bear market?

    Also if I bought a dividend stock years ago, and it’s yield on cost is high, why would I sell it?


  2. Fulano Mengano says:

    Yield on cost is one of the most stupid ideas I’ve ever heard. The argument that a stock purchased 15 years ago @ $10 that pays $1.50 dividends = a 15% yield on cost, is ridiculous. If the stock has a current value of $150, it means that it’s yield is 1%. Some people argue that keeping that stock because it has a 15% yield on cost is better than selling the stock and getting a GIC @ 2%. Keep dreaming.

  3. Christian Haikala says:

    I’ve been investing in two dividend paying stocks over several years now (BCE & ENB) via a DRIP using dollar cost averaging in my self-directed investment account. It has beed as exciting as watching paint dry on a wall during these turbulent times but the results have been rewarding. I will continue to do so even if the markets tank as I will be shopping for bargains.

  4. Read ANY book on Dividend Stock investing and yield on cost is the basic premise! You buy a stock that has a history of increasing its dividends year after year for what is essentially compounding interest.

    Read this… learn….

  5. jb says:

    Hey Fulano,
    So, what constructive advise do you have for Confused? Your insulting post is a trademark of a jerk !


  6. Rules of engagement for my blog: civility and respect. Please avoid name calling and insults, or we will simply delete your comments.
    On the dividend debate it comes down to this. If you have held some stocks from prices which are far below present levels and you are collecting higher dividend yields, and YOU ARE CONTENT TO HOLD THEM SHOULD THE CAPITAL FALL 20-30%, then so be it. You can chose to do nothing and stay with your dividend collection. One caveat there is that dividends always are at the discretion of management as they are paid out of profits. Profits can decline, management can suspend or reduce dividends as needed. So always keep in mind dividends are the goal but never guaranteed. In my experience, most people react badly if their capital value declines double digit and “I’m holding it for the income” becomes insufficent comfort. If you make a personal decision that the do nothing approach is for you, then that is your choice. What I was really commenting on in this article was how so many investment “experts” offer the mantra of “don’t worry about bear markets, you can take refuge in dividend paying stocks”. When you see the price declines shown in the charts, the relevant question is the one I posed, “is this your idea of capital protection?” For me, and for every client I have ever worked for, it is not.

  7. Yes, I am very aware that a company can cut dividends at any time. I haven’t been investing long, but the plan is to dump any stock that cuts it’s dividends.

    The ‘market timing’ suggested in the article makes me a little uncomfortable. I wouldn’t know where to begin other than maybe looking at moving averages, but I don’t know how reliable that is. Depending on the firm, or blog to tell me when to sell is also disconcerting when there typically is no detailed information that would allow me to come up with the same verdict on my own; even if the blog/guru/firm is right all the time, what happens when he/she dies, retires, decides to charge a big yearly fee, etc.

    For a do-it-yourselfer, would you recommend just following a cut-loss policy of something like 10%?

    Thanks for your detailed reply earlier, and I’ll try to sound less snippy in my replies to others.

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