The Best Thing to Do in a Down Market

08/03/2011 7:00 am EST


John Heinzl

Reporter and Columnist,

Watching your dividends pile up can help keep you calm when the markets are roiling, writes John Heinzl, reporter and columnist for Globe Investor.

"Do you know the only thing that gives me pleasure? It’s to see my dividends coming in."—John D. Rockefeller

I’m not sure it’s the only source of pleasure in my life. That would be kind of sad. But I would have to concur with J.D. that receiving dividends is one of the most enjoyable experiences an investor can have.

Why, just the other day I received a $52 dividend from Bank of Nova Scotia. The next day, Canadian Imperial Bank of Commerce handed me $87. The day after that, the nice folks at TransCanada Corp. credited my account for $151.20, and I got another $114.88 from one of my ETFs that invests in real estate investment trusts.

Okay, I’m not rich—yet. But I’m seeing my dividends coming in, and I can assure you it’s pleasurable. And remember, this is at a time when stock markets are plunging.

Like most people, I don’t like seeing my stocks get hammered, but I have faith that they will eventually rebound. Knowing that I will receive a dividend keeps me from doing something foolish—like selling in a panic.

This is one of the chief benefits of dividend stocks—they help you stay calm when everyone around you is gripped by fear. Experts agree that keeping your emotions under control is one of the most crucial prerequisites for becoming a successful investor.

What else do I like about dividends? I’m glad you asked.

You’re rewarded for laziness. When you have a job, you usually have to show up to get paid. Not so with dividends. Even if you sleep in until noon and stay in your pajamas all day watching Dr. Phil, the company still pays you. And nobody will haul you down to HR for a chat.

Your "salary" will grow. By focusing on companies that raise their dividends—pipelines, power producers, banks, and well-known consumer-goods companies, for example—you can be fairly certain that your income will grow over time.

This protects you from the effects of inflation, and leads to a more comfortable retirement.

NEXT: You don’t have to think too hard.


You don’t have to think too hard. Dividend-growth investing isn’t the only strategy that works, but it’s one of the simplest for do-it-yourselfers to implement.

Most people can look up a company’s historical dividend record and understand a dividend-payout ratio, whereas becoming a successful deep-value investor or employing complex hedging strategies requires a level of skill beyond the reach of most lay people.

Dividend-growth investing "is the easy path and the sure path in the stock market, one that requires time and patience more than it requires cleverness and heroics," writes US money manager Lowell Miller in The Single Best Investment: Creating Wealth with Dividend Growth.

You get income and growth. A common misconception about dividend stocks is that they’re stodgy, slow-growth companies. Not true. RBC Dominion Securities reviewed data going back to 1946 and found "a strong positive link between dividend payment and prospective earnings growth."

What’s more, with the exception of the 1990s tech bubble, "a dividend strategy has proven successful in beating benchmark returns in almost every decade since the 1930s."

You benefit from compounding. Harnessing the power of compounding is another important element in a successful investing strategy. This is a snap, thanks to dividend reinvestment plans that automatically use your dividends to purchase additional shares.

Alternatively, you could shovel your dividends into a low-cost mutual fund whenever you build up enough cash for a minimum purchase. That’s exactly what I did with the dividends I received over the past few days, which means I’m buying at the best time—when prices are down.

You (usually) avoid mistakes. Companies with a record of rising dividends usually have some sort of competitive advantage—a strong brand name, dominant market position or regulatory protection, for example—that allows them to increase their earnings steadily.

By focusing on dividend-growth stocks, you’ll generally invest in stronger companies. True, occasionally a dividend-growth company flames out—Yellow Media Inc., anyone?—but most Canadian banks, utilities, pipelines and global consumer companies keep chugging along.

You get paid to wait. You often hear this when a stock has been going sideways or losing for a while, and it’s true: As long as the dividend checks keep coming, it’s easier to ride out stock market drops, such as the one we’re experiencing now.

In fact, as bad as things seem, I’m feeling quite a bit of pleasure.

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