Is It Time To Say Goodbye To Dividend Investing?

Bye-bye, dividend stocks.  We’ve had a great run.  I know I said I’d hold you forever but it’s clear you’re in a bubble now and it’s time to abandon this strategy before the bubble pops.

Dividend fever has taken hold and driven blue-chip dividend payers to new heights.

Investors flocked to dividend stocks for safety after the market crashed in 2008.  Seniors, weary of low interest rates and bond yields, looked to dividend stocks for the steady, growing income.

Dividend stocks have delivered market beating returns for years, but now their time is over.

Dividend investing is old news

Remember my investing policy statement?  The one that said I’d buy dividend stocks when they’re value priced and hold them for the long term.

The policy also states that I won’t sell individual stocks unless the dividend is reduced, the dividend pay-out ratio becomes too high, or the company is no longer focused on growing its dividend.

Well, everything was fine when my strategy was working.

My portfolio of dividend growth stocks returned 17% per year from 2009 to 2012.  This year has been a different story and it has tested my mettle.

January and February started off hot, up 4 and 3 percent respectively, but things have cooled off since.  My portfolio is only up 6.7%, year-to-date.

I can’t sit idly by and watch my boring, defensive dividend stocks tread water while exciting, cyclical growth investments like technology companies and auto manufacturers start to pick up steam.

Related: Do Stock Market Cycles Influence Your Investing Behaviour?

Heck, even airline stocks like WestJet are soaring high, more than doubling since December 2011 before some recent turbulence.

What’s the next hot sector?

I simply can’t accept mediocre returns and just kick back collecting dividends when I could be investing in companies like AutoCanada Inc. (ACQ), a growth stock that’s up 78% so far this year.

I need to jump into the next hot sector.  That’s what winning investors do.  Buy low, sell high.  Know when your investment has reached its full potential and take your profits.  Then catch the next shooting start before it takes off.  Rinse and repeat – it’s that simple.

After all, even blue-chip companies that have been delivering steady returns for decades are susceptible to a downturn, and you don’t want to be caught holding on to a loser.

Sure, companies like Telus have sent bullish signals, projecting to grow its dividend by 10% per year through 2016.  But that’s surely a sign of overconfidence, not an indicator of strong business growth.

Related: 6 Reasons To Invest In Dividend Growth Stocks

Bond yields are rising as the economy improves, which spells trouble for dividend stocks and REITs.  With interest rates projected to rise soon, blue chip dividend growth stalwarts like Fortis, TransCanada Corp and BCE are expected to slump.

Those old, stodgy widow-and-orphan stocks don’t stand a chance in the new economy where growth is king.

Holding steady, just like dividends

On second thought, do I really want to invest in non-dividend paying stocks, or buy cyclical stocks that’ll pay dividends until the first sign of trouble in the economy?

I’m not very confident in my ability to successfully time the market, jumping from dividend stocks to growth stocks at the bottom and top of each cycle.

Remember, companies that pay dividends post better results than companies that do not – achieving that nearly two-thirds of the time since 1973.

Related: Why I Became A DIY Investor

Among those stocks, the ones that grow their dividends have achieved even better results over the past 30 years – 10.3% per year versus 7.6% for stocks that don’t increase dividends.

What about those non-dividend paying stocks?  They produced returns of just 1.6% per year over the same 30 year period.

SourceWhite Paper: Dividend Investing Comes Back Into Vogue

What about share buy backs; aren’t they just as good as a dividend increase?  Not exactly.  Since 1979, companies who grew or initiated dividends outperformed those who repurchased shares.

  • Dividend growers – 10.6% compound annual growth rate
  • Repurchase growers – 8.8% compound annual growth rate
  • S&P 500 – 7.7% CAGR compound annual growth rate

Dividend stocks can also lower the overall volatility in your portfolio, smoothing out returns while providing protection against inflation with rising income.

Final thoughts

There’s no doubt that dividend investing falls in-and-out of favour over the years.

When they’re in favour, dividends provide the safety and income that investors seek in troubled times.  When they’re out of favour, dividends can’t compete with real drivers of growth like research and innovation.

Related: How To Use A Stock Screener To Find The Best Investments

I may have had a momentary lapse in judgement, but I’ve come to my senses.  I’m not saying goodbye to dividend investing.

Sure, I may take more care when deciding whether to buy a new company or add to an existing position.  This isn’t 2009 when bargains could be found across all sectors.

But I’m not going to hop from one investing strategy to the next just because some rough waters are ahead.

I’m still going to save, and I’ll continue to call myself a dividend investor – buying stocks when they’re value priced and holding them for the long term.  That’s what my investing policy says.


25 Responses to Is It Time To Say Goodbye To Dividend Investing?

  1. I’m a first time commenter because I loved this post! This was hilarious!! As I started to read I thought OMG what is this guy thinking??? He is going to do everything I have learned NOT to do! Glad you came to your senses by the end of your post ;) Holding to your plan, whatever it may be, is they way to go through all the ups and downs. I was lucky and had cash to invest (only due to procrastination – sometimes it’s a good thing) after the big crash and I am pretty sure I will never again in my life be able to buy such great companies for so cheap (at least I hope). It makes it difficult to decide when is a good time to buy. But watching the markets and sticking to a plan will get you further than chasing the hot stock.

  2. You had me worried for a moment Robb. I thought you had lost your mind or had been hacked.

    I am sure there are exciting rapid growth companies that will make millionaires out of early investors but there are more that will fall apart and investors will lose every penny invested.

    I am the tortoise and not the hair. Drip, drip, drip.

  3. Robb, I’m sure you’d find plenty of buyers who will gladly take your div stocks off your hands – for a discount of course :)

  4. Haha, nice piece – once again we were in a similar mood for a Monday post.

    I’m with you on this – stick with what you know. If you eventually do diversify out, do it with eyes wide open and a ton of book knowledge in your head – and watch very closely, heh. Good stuff!

  5. Thanks everyone, I decided to have some fun with this after reading much about how dividend stocks are overvalued and dividend investors should take their profits and seek other investments.

  6. Robb,

    You kept up the act a bit longer than I was expecting…by the end, I was actually starting to buy into your rant.

    I’ve accidentally (long story) accumulated a fair bit of cash, which could come in handy if/when Mr Market moves out of dividend stocks, as seems likely in the next several months. The trick for me is waiting until prices actually fall, because the money is sitting idly by at present, and it’s starting to burn a hole in my pocket.

    Another temptation is to sell my divvy stocks now, and re-purchase them after the fall comes. Decisions, decisions!

    • @LoonieLover – I don’t have the stones to sell everything and wait for an opportunity to re-purchase.

      At least with holding dividend stocks you’ll get paid to wait. According to the white paper I linked to in the post, dividends accounted for 44% of investors’ total return for the S&P 500 on an average annual basis from 1926 to 2011.

    • Market timing is a highly risky sport Loonie. Dumping to cash and waiting for a bottom sounds great today, but short term plays often do not work as expected. It is best not to do it without calculating possible losses.

  7. Good one! I kept going back to check the byline as I read through the post. About 2/3 through, the location of your tongue vis-a-vis your cheek finally dawned on me.

  8. I also maintain a large dose of dividend payers in my portfolio and have not sold in response to the recent down turn. However it is worth noting that for almost all of the 30 year period that you quote interest rates have been falling. Since they are nearly 0 now it is unlikely they will continue to fall. Does the S&P500 story hold up for the 30 years from 1949 to 1979 where interest rates were rising?

  9. Buy on the dip when everyone else is feeling the pain and jumping ship. I need to add more dividend to my portfolio not the other way around. I like your investing strategy so stick with it.

  10. I have always been against timing the market. It’s easy to look at historical prices and say what you should have or shouldn’t have done. It’s a complete different beast to actually succeed at timing the market over the long term.

    Your dividend blue chips may not look too attractive to you when looking at other “hot” investments, but I would caution against jumping on the “what’s popular now” bandwagon.

  11. I underestimated your sneakiness! You got me!

    I know dividend investing might fall out of favour in the next few years, but it’s a proven strategy and will continue to work well for years to come.

    I’m waiting patiently to pounce on some good buys once we see the bottom of this sell off.

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