When Markets Dish Out Pain, Dividend Yields Can Cushion the Blow

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It’s official! After several months of suppressed volatility and ever-rising stock prices, markets finally got smacked.

The Dow Jones Industrial Average dropped more than 270 points in a single day recently, putting it well below the 22,000 level it breached for the first time in early August.

The small cap Russell 2000 Index, which has been underperforming the larger-cap S&P 500 for months, actually went NEGATIVE on the year. And the VIX index of volatility surged from around 9 to as high as 17.

We’re not talking about wholesale panic or anything. But it was definitely enough to get people’s attention – and if this correction worsens, you’re going to be glad you have some dividend protection in your portfolio!

What do I mean by that? Well, I’ve established before that stocks, ETFs, and mutual funds that pay market-beating, yet reliable, dividends are a great way to build wealth over the longer term. But they also help you protect that wealth better during periods of market turbulence. Here’s the evidence:

==> Since the late 1920s, there have been 46 times when stocks dropped at least 10% for two consecutive months. If you look at how the two groups of stocks paying the highest dividends performed during those corrections and bear markets, you’ll find they crushed non-dividend-payers. The difference in performance? About 12 percentage points on average.

==> Companies are also extremely reluctant to cut dividend payouts, even in times of significant stress on earnings. During the five major recessions from 1973 through 2009, S&P 500 earnings per share plunged by an average of 42%.

But dividends per share only dipped 8%. In three of those recessions, dividends were reduced by 1% or less … even as earnings tanked anywhere from 15% to 32%. That helped give fundamental support to dividend-paying stocks.

What about more recently? Well, I put together a table showing the short-term performance of a handful of popular dividend-focused ETFs from providers like Vanguard, iShares, and PowerShares. I chose the 10-day period running through Friday, August 18 because that captured the period of recent volatility. I also included the SPDR S&P 500 ETF (SPY, Rated “B”) and iShares Russell 2000 ETF (IWM, Rated “B”) for comparison sake.

You can see that the Utilities Select Sector SPDR Fund (XLU, Rated “B”) actually rose 0.7% during that 10-day correction period. All four of the dividend-focused ETFs declined, but by a lesser amount than the S&P 500 (down 1.9%). They also dramatically outperformed the riskier, small-cap focused Russell 2000 (down 3.7%).

Bottom line: Whether you’re looking for longer-term profits during rising markets … or shorter-term protection during falling ones … high-yielding, dividend-paying investments are a great way to go.

Until next time,

Mike Larson

Mike Larson is a Senior Analyst for Weiss Ratings, and is also the creator of the course “How to Pile Up Profits from the Greatest Interest Rate Cycle in 5,000 Years“. A graduate of Boston University, Mike Larson formerly worked at Bankrate.com and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, Associated Press, Reuters, CNNMoney and many others.

 

Mike Larson is a Senior Analyst for Weiss Ratings. A graduate of Boston University, Mike Larson formerly worked at Bankrate.com and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, Associated Press, Reuters, CNNMoney and many others.