Let Dividend Stocks Protect You From the Bear Market
The market has been brutal in 2022, especially over the past couple of months.
The S&P 500 is down 16%, while the Nasdaq Composite has fared even worse, falling 25%.
But there’s been a place to hide.
Dividend stocks not only have given investors shelter from the raging storm but also have provided a hot meal and a comfortable bed for investors to rest their weary heads.
In the January issue of my newsletter, The Oxford Income Letter, I discussed why I expected value stocks – particularly dividend stocks – to outperform this year.
And outperform they have.
The iShares Core High Dividend ETF (NYSE: HDV) is up 4% year to date. The top three holdings of this exchange-traded fund (ETF) are Exxon Mobil (NYSE: XOM), Johnson & Johnson (NYSE: JNJ) and Verizon Communications (NYSE: VZ).
The SPDR Portfolio S&P 500 High Dividend ETF (NYSE: SPYD) is also in positive territory, up 2.8%. This ETF lists Seagate Technology (Nasdaq: STX), ConocoPhillips (NYSE: COP) and Iron Mountain (NYSE: IRM) as its top holdings.
And the WisdomTree U.S. High Dividend Fund (NYSE: DHS) has gained 4.6% year to date. Its top three holdings are Philip Morris International (NYSE: PM), Altria Group (NYSE: MO) and AbbVie (NYSE: ABBV).
It shouldn’t be a surprise that stocks that pay strong dividends not only are outperforming the market but are still positive for the year, despite the market being quite weak.
The dividends received act as a buffer. If you’re collecting a 4% dividend yield and the stock falls 4%, you will break even. So when markets are bad, dividends can offset some of those losses.
But the markets are currently down far more than 4%, so it’s not just the dividends that have led to positive returns. These stocks are actually going up in price despite the poor overall market.
Entering this year, dividend stocks were dirt-cheap. Everyone was focused on growth stocks and finding the next Tesla (Nasdaq: TSLA), bidding growth stocks up to ridiculous levels and ignoring more mature companies with loads of cash flow.
As markets tumbled, high-flying growth stocks had much further to fall than value stocks.
My strategy over the past few years has been to load up on low-valuation dividend stocks, especially those with solid starting yields and strong dividend growth.
That has led to all three of my stock portfolios in The Oxford Income Letter being positive year to date and each beating the market by at least 10 percentage points – in a year when the S&P 500 is down 16%.
For example, the Instant Income Portfolio has returned 5%, crushing the S&P 500 by 21 percentage points.
Long-term investors should use the recent sell-off to accumulate their favorite dividend payers cheaply, if they have, in fact, gone down. While most stocks did, dividend payers did their job and provided refuge for investors who would otherwise be drowning in losses.
It’s summer. The weather is awesome and school is out! This year, we will be a little frugal and…