The bear is on the loose. The Standard & Poor’s 500 Index has fallen 14 per cent this year, inflation is accelerating, home foreclosures and unemployment are rising, and banks are going bust.
When a bear market starts its rampage, stock investors often retreat to safer vehicles such as companies or funds that pay steady dividends. Conventional wisdom says dividends offer insulation during a sell-off. Investors tend to dump companies without dividends and hold on to those promising a payout.
Corporate losses and a looming recession expose the chink in the less-than-armour-plated idea that dividend payers are in safe harbours. Such companies are often vulnerable in a sour economy.
There are exceptions. The power of consistently sharing profits is appreciated when the economy suffers. The stock price of Altria Group Inc., the Richmond, Virginia-based tobacco company, is up 4 percent over the past year. Thanks to a hefty 5.5 per cent dividend yield, the total return is about 9 per cent. Moreover, the company’s beta, or correlation to the larger market, was 0.61, according to data compiled by Bloomberg. A beta of 1.0 means a firm or fund moves in lockstep with the S&P 500 Industrial Index.
I’m not suggesting you invest in Altria, or any tobacco company or single stock for that matter. What’s worth watching during a bear run is a stock’s or fund’s beta, or how closely it moves with the overall market. ‘Blue Chips’
Mutual funds that invest in dividend payers tend to have high betas. Composed mostly of mature companies with large market values, they are the ones that often lead the S&P 500. We used to call them “blue chips” before the dot-com bubble burst in 2000. Even if you are a devotee of the dividend-protection theory, you have to be careful. Funds that track the S&P or Dow Jones Industrial indexes might still lose money in a bear market. Should you just avoid any fund with dividend in its title? No, as there are funds with lower risk.
Your Risk Profile
While there are companies/funds that will withstand a bear market due to robust dividends, you may still lose money from share-price declines. Buy-and-hold investors who reinvest the dividends in new shares are best suited for such vehicles. When prices drop, you buy more stock through “dollar-cost averaging.”
What’s more important during a bear market is to re-evaluate your ability to handle losses. If you’re close to retirement or need money for a big purchase, your “essential” funds shouldn’t be in the market.
You would be better off in a money-market account, insured certificates of deposit or Treasury Inflation Protected Securities for money you can’t afford to lose. Should losing money now impair your ability to reach a life goal, then it’s best to avoid a cranky ursine market altogether.
(John F. Wasik is a Bloomberg News columnist. The opinions expressed are his own.)