The market is gyrating again and investors are looking for places to hide. With interest rates so low, many people don’t want to move into bonds this time around. So where to invest your money and earn any kind of yield? The answer was once “bonds”, but given their low yields this could ruin many retirement plans. What is the answer to that question now?
Let’s Look At History
Ah yes, history can repeat itself, sometimes for the better. I want to look at which companies did just fine during the last recession of 2008-2010 and even managed to boost their dividends during that time. These companies are usually not very cyclical and produce items that people cannot live without.
Let’s take a look at three of these companies. They are Procter & Gamble (PG), Kimberly-Clark (KMB), and Altria (MO).
Here are some characteristics that make these stocks such great investments during volatile times.
Notice first how all three companies increased their dividends during the last downturn. This is pretty amazing. Also, none of them saw a share price decline while the S&P500 declined over 50%. This is truly a testament to how resilient they are. It also shows that they sell products that people will continue to spend money on, even when times are tough.
So let’s break it down. The three key benefits here are:
1) These companies keep paying the dividends and continue to increase them,
2) Their stock prices do not decline as much as most stocks during a recession, and
3) The volatility of these stocks is lower than other stocks that don’t pay a solid, consistent dividend over time.
Let’s take a look further into the volatility aspect. In this very informative article the author shows that dividend-growth stocks have volatility levels that have historically been about 33% lower than non-dividend paying stocks. Why is this? Because dividend payments are fairly stable for these stocks, while prices can swing wildly.
Looking At The Results
I ran the analysis in our personal financial planning software. I started with a retirement portfolio that invested only in the S&P 500. The volatility for the S&P 500 have been about 16% over the last decade. I then ran a scenario where I instead moved this money to my dividend-growth stocks. The standard deviation (volatility) was decreased by about 33% for these stocks for reasons I mentioned earlier. Please note that I am not recommending that you invest in only 3 stocks. For my own investment portfolio I am diversified among several dividend-growth stocks that have similar characteristics as the ones we are looking at here.
By moving the investments to less volatile stocks I found that the probability of never running out of money (using Monte Carlo analysis) jumps by 20%.This swing in plan success rates is mostly due to the stable nature of the dividend payments that provide income before and during retirement.
Let’s Not Lose Sleep Over Stock Price Movements
Here is something that many people never think about when it comes to more stable dividend payers. The principal value of the stocks becomes almost meaningless if held for a long time. Why? Because their dividends eventually become the most important part of the total return!
This is powerful stuff. When price movements barely matter any longer, investors can sleep more soundly and not worry about big price movements. It is a very nice feeling indeed to sit back and watch the dividend checks roll in while most investors are panicking. This is what great dividend payers can do for you.
Each person and couple has a different situation and might need to change a variety of things in order to meet their retirement goals. But it is very tough to tell whether or not you can retire when you want until you sit down and actually run through the numbers. At that point you can begin running interesting scenarios that will tell you what you need to do to get to your goals.
About the author: Doug Carey is the owner and founder of WealthTrace, a financial planning and retirement planning software company. He has over 20 years of experience in the financial markets. He is a Chartered Financial Analyst with a Masters degree in Economics from Miami University in Oxford, Ohio.
Photo: Flickr: The Orkla Group