Dividend investing in a COVID-stricken market – yay or nay?
2020 has been a year unlike any in recent memory. The climate crisis, geopolitical tensions with Iran, and recession fears all weighed on our minds. And then, COVID-19 stampeded into the room like a bull in a china shop.
Ever since, markets have been turbulent. After diving nearly 40% in March, they’ve rebounded nicely. Along the way, though, it’s been a roller coaster ride. The Dow Jones goes up 3% one day, then down 2% the next. There are whispers that when extended unemployment benefits end, we’ll have a major crisis on our hands. Meanwhile, COVID isn’t going away – in fact, it has come back with a vengeance in many parts of the US.
Suffice to say, buy-and-hold investing isn’t exactly appealing right now. Even day trading is a risky endeavor. In their place, many are advocating investing in dividend stocks. Why dividends? This class of investment offers regular, consistent payouts.
Should you go long on dividend-bearing stocks in today’s investment climate? We’ll attempt to answer that in today’s post.
Mr. COVID’s Wild Ride, Or The State Of Stock Markets In 2020
If you looked in a mirror lately and saw scores of newly grey hairs, you’re not alone. We’re only halfway through 2020, and we’ve seen double-digit swings on every significant world stock exchange.
To figure out how we got to here, though, let’s replay 2020 from the beginning. The year started on an optimistic note. Despite apocalyptic bush fires in Australia and nearly going to war with Iran, markets continued to rise. In the US, unemployment sat at 3.5% in February. While hints of a recession were emerging, investor optimism drove the Dow Jones to one record high after another.
America’s top market reached its apex of 29,500 on February 12. From that point onward, reality reared its ugly head. COVID-19, a novel, poorly-understood pathogen, was freezing economies from China to Europe.
The virus had landed in America in January. At that time, President Trump told us everything was under control. He was wrong – by March, infections were exploding from coast-to-coast. New York City, America’s most densely-populated center, was getting whacked.
Nobody was immune to this disease. NBA players, country music stars, movie stars – everyone had it. Within days, entire countries were locking down. The reality of COVID-19 could no longer be denied. At one point, markets plunged as much as 3,000 points in a day. At its worst, the Dow Jones bottomed out in the 18,000 range – nearly 40% off its all-time high.
Then, just as quickly, things got better. What happened? First – and most controversially – the Federal Reserve stepped in to backstop the stock market. Then, investors piled into tech and pharma stocks. In any economy, there are winners and losers. Once panic selling fades, there is always money to be made.
Are Dividend Stocks A Safe Harbor?
Nonetheless, uncertainty continues to plague markets. Prior to the Corona panic, markets were mostly stable. VIX is an indicator of market volatility. The higher this reading is, the greater the day-to-day swings.
In January, before COVID became a significant concern, this value ranged between 12-16. On March 16, during the peak of the COVID selloff, it got as high as 82.69. For reference, the market was experiencing multi-thousand point drops (>10%) during that time.
These days, volatility has settled down somewhat. However, it remains much higher than what you’d see during normal times. Through the second half of June, VIX has traded in the 30s. This number means traders have endured sessions where markets have risen/fallen around 2-4%.
With a second wave incoming, uncertainty surrounding unemployment benefits, and what both mean for the economy, investors are getting worried. At the same time, it’s a drag to hold all your savings in cash. Fortunately, dividend stocks offer an alluring alternative to conventional equities.
Dividend stocks dispense periodic cash payments to shareholders based on their value: the more stock you own, the higher your payout. A dividend stock’s yield also influences payout amounts. For example, if a stock worth $10 per share has a 5% yield, you’ll get back $0.50 for every share that you own. Lastly, dividend payout schedules vary from company to company. Most do quarterly payouts, but some only do so semiannually.
Another advantage of dividend stocks is their relative inelasticity. Dividend investors prefer these equities for their predictability. The quickest way for a company to tank the value of their dividend stock is to cut or pause payouts.
For this reason, publicly-traded companies that offer dividends are hesitant to mess with their formula. If anything, firms boost dividends in bad times to increase investment.
Look Beyond America For Safer Dividend Plays
In most economies, dividend stocks are relatively safe investments. However, the United States is going through unprecedented economic struggles right now. Leadership at the federal level is the weakest it’s been in decades – with enormous challenges ahead, the USA is not in an enviable position.
Meanwhile, governments in other developed economies have taken (and continue to take) massive action to protect industries and workers. From Australia’s JobKeeper Payment to Canada’s CERB, these programs have put their respective nations on a more solid footing than America.
To put it bluntly: If you are overweight on American dividend stocks, you risk losing income to pauses and yield cuts. Because of this, we recommend diversifying your portfolio to include foreign dividend stocks.
Over the border in Canada, Bank of Montreal ( BMO) is an excellent pick. They’ve issued dividends for over 190 years straight – through every economic calamity imaginable, they’ve remained consistent. Don’t overlook the dogs of the TSX either. These growth-minded companies have generated tons of capital for investors – they can do the same for you.
Other prime dividend markets abroad include the LSX (UK), Frankfurt, Singapore, and ASX (Australia). Look for top-performing dividend stocks, take out companies who have cut dividends in the past, and you should be good to go.
Dividend Stocks: Secure Income In Insecure Times
In times of uncertainty, there’s nothing more appealing than a sure thing. Dividend stocks provide consistent income to their investors. By diversifying your holdings, you can minimize the impact of price drops and yield cuts.
