January 15, 2025
Load for Bear with Dividend Growers
Dear Subscriber,
 |
| By Sean Brodrick |
In January 2024, I wrote:
“What does this year hold for us? Can the good news continue, or does the devil finally get his due?
“I am more bullish than most. That might go against your gut feelings. I know a lot of people have a bad feeling about this economy. I understand, and I’ll explain why you should be bullish.”
I was bullish in 2024 when many weren’t. And I was proven right.
The S&P 500 ended the year 23% higher. That’s more than twice its historical average.
Today, I wish I could be broadly bullish for 2025. And I am happy to say I see stocks and even whole industries that will thrive.
Unfortunately, I see a lot of market volatility against a developing background of stagflation.
That’s a topic for another day. Instead, I want to address what to do if the markets do turn south in a hurry this year.
Let me ask you this: Are you worried about a bear market? Are you loaded for bear?
Stocks that pay dividends have a “cushion” to protect them from the bear’s claws … a cushion that others don’t.
In a bear market, a dividend gives stocks support to land on when the market falls.
But to really beat the bear, you don’t want just dividend payers. You want dividend growers.
First of all, let’s establish that yes, dividend payers beat the market over time, rain or shine.
In his book Active Value Investing, Vitaliy Katsenelson illustrates that between 1900 and 2000 the average annual return from the S&P 500 was 10.4%. And of that, 5.5% came from dividends.
Further research showed these returns were “lumpy” depending on whether it was a bull or bear market. Katsenelson found that in secular bull markets, dividends accounted for 19% of annual average stock market returns (the rest coming from capital growth).
That’s not bad. But in sideways markets, dividends accounted for 90% of the returns.
Meanwhile, in his book, The Future for investors, Dr. Jeremy Siegel said there are two ways dividends help your portfolio in bear markets.
First, reinvesting dividends to buy more shares helps cushion the fall in a bear market.
Second, those extra shares enhance future returns. Siegel says this turns dividends into a “return accelerator”, once the market bottoms and prices head higher again.
And Ned Davis Research has done multiple important studies on dividends. Here are the three most important findings.
- Dividend Payers Prosper — From 2004 through 2023, companies that pay dividends have tipped the overall scale of the S&P 500’s total return in a big way.
As you can see, non-payers have produced much lower results than payers.
- Dividend Growth Is Key — From 1973 through 2023, dividend growers and the companies that initiated a new dividend led all stocks higher.
The two worst performing categories were companies that either don’t pay or had to cut their payment. That’s key to long-term performance.
- Volatility & Risky Markets Make Dividends King — Dividends historically increase returns AND reduce risk.
Here you can see that dividend growers average double-digit returns despite being the lowest-risk category.
They do even better when the market is more volatile — exactly what I’m predicting in 2025:
So, if you think the major U.S. indexes are in danger of heading into a bear market, 1.) You want dividend payers, and 2.) you especially want dividend growers.
Importantly, I’m a cycles guy. So, I’m looking for dividend payers that are riding big trends and cycles in the global economy.
That means these stocks have cushion on the downside from dividends … and they are poised to rip to the upside as the big cycles come into play.
If you’re doing this on your own. Be careful. There’s nothing worse than buying a dividend payer only to see that company CUT its dividend.
As the chart above showed, those are the worst performing stocks.
But if you’re worried about where this market is headed, you’ll want to add more dividend growers to your portfolio.
If you want to skip individual stocks and use an ETF, there are dividend grower ETFs. Two examples are:
- The Vanguard Dividend Appreciation ETF (VIG), which sports a 1.73% dividend yield and has an expense ratio of 0.06%.
- The ProShares S&P 500 Dividend Aristocrats (NOBL). This sports a 2.06% dividend yield and has an expense ratio of 0.35%.
ETFs are generally less volatile than stocks. But you’ll have to accept lower returns in both price and dividend yield, too.
All the best,
Sean
P.S. There’s another way to pad your portfolio with risk-reducing income for 2025, you need to check out yesterday’s special event about “Supersized Crypto Royalties.” Check it out here.
Tidak ada komentar:
Posting Komentar