As I started my dividend investing in September of 2021, nearly at market highs, I noticed that investing spaces on Twitter and Reddit paid much more attention to future growth prospects than healthy balance sheets or dividends. The pandemic brought a new swath of retail investors into the playing field who favored these stocks much more than the safer and slower stocks favored by dividend investors.
However, these trends don’t always last. Recessions are always a possibility. It’s just a matter of when. Now the market is dealing with the highest inflation levels since 1981 and the ground beneath us is shifting. The Fed is fighting back by rising interest rates which increases the possibility that a recession is looming around the corner.
The S&P 500 had its worst month since March of 2020, this April with a loss of 8.8%. At the end of April, the market’s year-to-date performance was -13%. Tech, a high growth sector, lead the downfall. The tech heavy NASDAQ was down 20% YTD in the end of April. The MSCI All Country World Index fell 8% for the month. Even fixed income came under pressure, with global bonds dropping 5.5% for the month.
This environment has caused growth plays to struggle and showed that quality dividend stocks are resilient. In the midst of the pandemic, massive amounts of government spending and lax monetary policies allowed investors to take advantage of extremely speculative investments in crypto, SPACs, meme stocks, and growth stocks with absurd valuations. Attracted to the potential of huge gains, investors flocked to these instruments at inopportune times (hindsight 20-20 obviously). ARKK, led by the famous Cathie Wood, was the posterchild in this environment with speculative growth holdings in companies like Tesla, Zoom, Square, Coinbase, and more.
Expectations for monetary policies have seen a major shift this year with interest rate expectations being over 2% after more 50 basis point hikes at each of the Fed’s next meetings. The Fed’s appetite for interest rate increases right now has caused investors to de-risk their portfolios. These speculative plays that have led the markets for the last year or so are now the first to feel the pain. As evident by the graph below (keep in mind the recency of my portfolio makes this graph look more dramatic than it is on the long term) a good dividend portfolio in our current environment is a much safer bet. Slow and steady wins the race.
The moral of the story is that no one can predict when the cops will come to shut down the party. Sticking to a long-term strategy that aligns with risk tolerance and goals is great for long term performance. Companies that can maintain healthy margins thanks to strong pricing power will likely be relative outperformers as the markets navigate this environment.
Now this strategy isn’t for everyone, but it works. I bet on strong dividend paying companies with a strong balance sheet and a reasonably foreseeable decent performance. These companies have stood the test of time, they have strong products, durable cash flows, and dividends that are paid regardless of market conditions.
This method of investing will never be as exciting as the strategies that led the rally through the pandemic. But their predictability, to me, is attractive. As the market continues to look risky and speculative plays perform poorly, investors will rotate into companies that can withstand a recession.
It would be better if a recession could be avoided, but no one has a crystal ball to see how this all will play out. As usual, I will stay the course and stay very comfortable and confident in holding and growing my portfolio regardless of how gloomy the market continues to look.