Dividend Stocks Are Valuable in a Volatile Market

Originally published on usnews.com, January 15, 2019.

Dividends look safe, but careful investors are watching to see if an economic dip trims payouts.

FOR MANY A mild-mannered investor, the word "volatile" is enough to inspire an unwelcome case of the willies. Maybe that's in part subliminal, as volatile rhymes with reptile, vile and futile – words that, when applied to a portfolio, are downright hostile.

And let's get real: Volatile describes the Wall Street at the dawn of 2019 like no other slice of argot. We're talking trouble with a capital "T" when mighty market anchors such as Apple (ticker: AAPL) lose more market cap in three months – in excess of $450 billion – than the entire worth of Facebook (FB). Not that Facebook has been woe-free. Hit by data controversies aplenty, its stock has tanked 34 percent over the past five months.

Then there's the trade war with China, perceived by many as a fight the U.S. didn't need to pick. Add the government shutdown, the drying up of economic stimulus as 2018's tax cuts fade into memory, four interest rate hikes in 2018, with more predicted to come.

Feeling volatile yet?

"I believe the major factor right now is the tariff war with China and how that will be resolved," says Greg Hammer, president of Hammer Financial Group in Schererville, Indiana.

Beyond Apple, "Technology will likely be the sector most effected by the tariff war and will likely have the most volatility," Hammer says. "Secondarily, the government shutdown could become a larger factor if it continues for a long period of time."

Yet where dividends are concerned, experts contend there's no reason to panic just yet.

"I don't see short-term market chop being a factor with regards to dividends," says Merlin Rothfeld, investment strategist and instructor at Online Trading Academy, based in Orange County, California. "Short to intermediate swings are great for active traders, but shouldn't have much impact on earnings."

What's more, dividends look into the future as companies base them on projected future earnings. "If prices continue down, this will put pressure on the consumption cycle resulting in weak earnings," Rothfeld says. "If that weakness persists, companies will begin to cut dividend payments."

"We don't expect dividend stocks as a class to be singled out by volatility," adds Kevin Barry, chief investment officer at Captrust Financial Advisors and based in Raleigh, North Carolina.

"When stocks drop and shareholders sell, companies can either increase dividends or buy back stocks," Barry says. "If a stock, for example, drops 40 percent in three weeks, the company can either return that capital to shareholders or buy those stocks back. We expect those companies to continue to increase dividends, however the rate of increase will likely decrease given the capital reinvestment into the company's shares."

Meanwhile, bear in mind (while keeping the market bear in mind) that 2019 hardly marks the first time Wall Street has weathered supremely choppy seas. It just feels like it because the bull market lasted nearly 10 years, an all-time record. It recalls at least in small part the years leading up to Great Depression, where making a killing on stocks seemed like a no-brainer and Wall Street like a money printing press.

Not 2018. What seemed at one point like a temporary emptying of the punch bowl turned into the end of the party. In December, the Dow lost some 2,500 points – close to 10 percent of its value – and capped its worst year since the Great Recession.

Even the much-ridiculed non-investment known as "cash" provided a better "return." Warren Buffett – who 99 percent of the time knows more about investing than all of us combined – has famously proclaimed, "The worst investment you can have is cash."

Ah, but Buffett has recently lost a ton on Apple: $4 billion on one day in November and another $3.8 billion on a single day in late December. Stuffing his cash instead under a bed – no doubt a very, very big bed – wouldn't have earned him a cent. But he'd be almost $8 billion ahead of where he is now.

And so, questions arise: Will owners of Apple and other once high-flying stocks find themselves even worse off if their dividends vanish into the ether? Or does the question demand a broader view of one's holdings?

If 2019 holds any silver lining (perhaps cigarette-ash gray is more like it), it's this: Volatility rhymes with opportunity. And it's out there, just as always whenever the bears shove the bulls out of the way.


Join over 170,000 Lessons from the Pros readers. Get new articles delivered to your inbox weekly.

Free Class