Bear or Bull? Dividend Investing is Timeless
Should you invest in dividend stocks in a bear market or a bull market? While price appreciation of a stock can be negative, dividend income is never negative. Dividend investing is timeless. Here’s why.
Dividends are Usually Paid in Both Bear and Bull Markets
If you purchase a dividend-paying stock, even if the price goes down for non-company specific reasons, you will continue to receive your dividend payment. This cash payout can also grow and compound on itself as you reinvest the dividends you receive.
Even though dividends are not guaranteed, there are many companies consistently paying dividends and there are several checks you can make to ensure you are investing in a company that has a long and consistent history of fulfilling its dividend commitments through all market conditions.
The best dividend-paying companies continue to issue dividends through recessions.
Dividend Payments are Timeless Contributors to Return
- Dividends can be a significant component of return. Even more so when reinvested and exploiting the power of compounding.
- History has shown us that over many decades dividend-paying companies provide better returns with lower volatility than non-dividend paying companies.
- Dividends can be a consistent component of total return.
- Dividends are an attractive form of income, especially relative to fixed income investments such as T-bills and short-term bonds.
- Dividend income (if eligible) is taxed at lower rates than many other income sources by the Canadian Revenue Agency.
Dividend Payments can be a Stable Component of Total Return
“The company must be paying dividends. Preferably, the dividend will have been increasing and have been paid for some time.” – Peter Cundill, Canadian Value Investor
Dividends are most often a more stable component of total return than the underlying stock price through bear and bull markets.
When a company can consistently pay and even increase its dividend over a long period of time, this usually indicates that the company can generate durable free cash flows through all phases of a market cycle, bear and bull and verifies the stability of its dividends.
Consider the following points 3 points about returns on dividend paying stocks:
- Many dividend-paying companies are more established and can have less downside risk than cash-constrained or generally riskier growth characterized stocks.
- Dividend-paying companies generally have an easier time rebounding from bear markets than growth stocks.
- Dividend yields are typically at a higher starting yield and lower price in a bear market trough (Dividend Yield = Annual dividend/Current stock price).
A Common Dividend Misconception Explained
Just because a company pays dividends rather than reinvesting in its own growth does not mean it is not growing. What it often means is that the company is profitable enough that it can pay a portion of its earnings to shareholders while still investing in its own growth.
Dividend Investing is Timeless
For investors with a long-term investment horizon, dividend income portfolios can contribute substantially to total return through bear and bull markets, especially where income is not needed in the short-term and can be reinvested.
Throughout history, dividend-paying stocks have proven to be an especially attractive investment during inflationary and volatile periods, providing investors with the possibility of growing dividends in line with, or exceeding, the inflation rate and with a reliable level of return in a volatile market.
Your Personalized Dividend-Paying Portfolio to Protect, Preserve and Build Wealth
Bloom Investment Counsel, Inc. specializes in providing actively managed, segregated, customized Canadian and U.S. dividend-paying portfolios for wealthy individuals, family offices, foundations, corporations, institutions and trusts.
Bloom Investment Counsel, Inc. is a well-established Toronto-based independent, privately-owned boutique investment management firm providing actively managed, customized Canadian and U.S. dividend-paying portfolios for wealthy individuals, family offices, foundations, corporations, institutions and trusts.
Founded in 1985, Bloom has experience in managing in excess of $2.5B in assets over the years. We believe that generating independent cash flow is central to the success of our clients’ portfolios because it provides capital for the present day, if needed, while continuing to preserve and build wealth for the future.
Follow Bloom Investment Counsel, Inc. on LinkedIn to stay up to date on our most recent articles.
This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.