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As I reflect back on 2008, I am caught by the overwhelming feeling that the year was actually a very good thing for dividend investors. It is easy to think that it was a terrible year for our kind! Both Bank of America and Citigroup – long standing dividend payers with wonderful dividend increases year after year – cut their dividend payments drastically. General Electric – the poster buy for dividend growth stocks – elected not to increase its dividend for the first time since the 1970’s. Pfizer too elected not to increase its dividend. These are very common stocks that are found in a number of dividend portfolio around the world, even mine.[ad#tdg-embedded]
For a time there, it felt like the end of the world was close at hand (maybe it still feels that way). However, personally 2008 was a very valuable learning experience for me and one that I believe will assist me in my future investing endeavors. Here is what I think it was an awesome year for dividend investors:
2008 Emphasized the Importance of Asset Allocation
I write a lot about asset allocation on this blog. I have become more and more convinced that asset allocation is the most important part of my dividend portfolio. In 2008, I was far too heavily weighted towards financial stocks (Bank of America, Citigroup, Royal Bank of Canada) and I paid for it. I am even more focused on ensuring my asset allocation is well diversified across non-correlated assets. This means that I am diversified across market sectors as well.
2008 Showed Investors their TRUE Risk Tolerance
I talked about this in an earlier post. I strongly believe that 2008 really showed investors their true colours when it came to their risk profile. I think a lot of investors, dividend investors included, were shocked at how risk adverse they really were and made stupid emotional decisions as a result of it. It is easy to take a risk assessment test and be overconfident in your ability to handle wild swings in the market, which will provide you with a more aggressive allocation than you can handle. Successful investing requires an investor to be able to manage their emotions to ensure they stick to their strategy.
2008 Focused Dividend Investors on the Strongest Stocks
The companies that made it out of 2008 alive are the strongest of the companies in my opinion. It really did separate the wheat from the chaff. The resulting impact was that dividend investors had a more targeted list of stronger dividend growth companies for potential investment. The crap is now gone and we are able to move forward. Think of it in Darwinism terms – only the strong survived and we should focus on those stronger plays in our portfolios. Investing 101 really – focus on the best and forget the rest.
I will be honest, I hope that 2009 is a better year from a returns perspective. However, at my wealth accumulation stage 2008 was a good year from a learning perspective. I know that for investors at later stages in their investment life cycles it was especially painful. However, I think the lessons are still the same.
Furthermore investors learned that dividend cuts in certain sectors beget more dividend cuts..
2008 also removed the “arm-chair” investors from the market. Hopefully, this will lower the volatility in 2009. I have more cash to spend, so I hope it doesn’t recover too soon. 🙂
Nice read!
D4L
I remember reading W. Bernsteins book, in it he said that young investors should pray for a bear market during the accumulation phase of their investment life.
I completely agree, a lot of stocks got hammered for no reason besides the fact that people just sold stocks regardless of if their business was okay or not. This gave us a lot of high dividend yields like Altria and GE which have enough money to pay off their dividends. It also taught us which companies were strong because only the strong ones could afford to pay these high yields on their dividends. If you have money, instead of keeping it on the side, you could lock up some great yields in strong companies right now.
I agree with you in many respects, and as a young person in the “accumulation” phase of my life, I feel like this is a golden opportunity (as long as I keep my job). That being said, I think it’s difficult to find a silver lining for those who were coming upon retirement or newly retired. What could possibly have saved them? Even the most prudent investor could not have found an asset class that was “safe.” Corporate bonds, high yield bonds, US equities, international equities, commodities, real estate are all down 40% across the board. That’s a lot of perceived wealth lost. When was the last time you had a financial advisor tell you that the best move would be to be 100% treasuries? And, how many would have told you this 18 months ago when it would have actually helped? To me, this is the scariest part about trying to figure out my risk tolerance.
Oh yea, one more thing. What are your thoughts on GE? I’m looking at it quite seriously. I realize there’s been a lot of worry about the dividend, but it seems to me that the Company still has more than enough free cash flow to cover it while it sorts out problems with its GAAP earnings. 10% yield on cost… maybe I’m just being greedy.
I had to bail on GE – I feel they’ll have to let either the dividend or the AAA rating go at some point. The dividend is the smarter one to cut. So many good companies cut, PFE this morning(even though it was part of a merger to raise cash), why not GE too?
I sold puts on KO instead keeping the cash from the sale still in cash. I love dividends but can make much more money right now on selling puts because they are so expensive.
I agree that nothing like pain teaches a lesson so well. I also wonder if some of the wrong lessons are being learned. Just yesterday I had a conversation with my brother, a business owner with a net worth of well over a million dollars–excluding real estate.
What he’s “learned” is that stocks aren’t real and shouldn’t be relied on at all. It makes me wonder. When this finally ends, will it take a generation for us to begin to invest again?