Dividend Stocks Are Recession-Proof? Dividend Aristocrats
An important feature of dividend strategies is that many of the shares have defensive qualities, i.e., they show relatively better price development when the market falls. We like to call these stocks “recession-proof”.
Virtually all equities fall in a declining market (hence the indices also fall), but solid dividend companies fall less.
The previous lesson mentioned Dividend Aristocrats, those that have paid an increasing dividend for at least 25 years in a row. History shows that these stocks have proved to fall less in a bear market. The table below shows how the Dividend Aristocrats have fared since 1990:
| Year
|
Dividend aristocrats % | S&P 500 % | Difference
% |
Differences When S&P 500 Is Up | Differences When S&P 500 Is Down |
| 1990 | 5.7 | -3.1 | 8.8 | 8.8 | |
| 1991 | 38.5 | 30,5 | 8 | 8 | |
| 1992 | 10.1 | 7,6 | 2,5 | 2.5 | |
| 1993 | 4.3 | 10,1 | -5,8 | -5.8 | |
| 1994 | 0.9 | 1,3 | -0,4 | -0.4 | |
| 1995 | 34.6 | 37,6 | -3 | -3 | |
| 1996 | 20.9 | 23 | -2,1 | -2.1 | |
| 1997 | 35.5 | 33,4 | 2,1 | 2.1 | |
| 1998 | 16.8 | 28,6 | -11,8 | -11.8 | |
| 1999 | -5.4 | 21 | -26,4 | -26.4 | |
| 2000 | 10.1 | -9,1 | 19,2 | 19.2 | |
| 2001 | 10.8 | -11,9 | 22,7 | 22.7 | |
| 2002 | -9.9 | -22,1 | 12,2 | 12.2 | |
| 2003 | 25.4 | 28,7 | -3,3 | -3.3 | |
| 2004 | 15.5 | 10,9 | 4,6 | 4.6 | |
| 2005 | 3.7 | 4,9 | -1,2 | -1.2 | |
| 2006 | 1.3 | 15,8 | 1,5 | 1.5 | |
| 2007 | -2.1 | 5,5 | -7,6 | -7.6 | |
| 2008 | -21.9 | -37 | 15,1 | 15.1 | |
| 2009 | 26.6 | 26,5 | 0,1 | 0.1 | |
| 2010 | 19.4 | 15,1 | 4,3 | 4.3 | |
| 2011 | 8.3 | 2,1 | 6,2 | 6.2 | |
| 2012 | 16.9 | 16 | 0,9 | 0.9 | |
| 2013 | 32.3 | 32,4 | -0,1 | -0.1 | |
| 2014 | 15.8 | 13.7 | 2,1 | 2.1 | |
| 2015 | 0.9 | 1.4 | -0,5 | -0.5 | |
| 2016 | 11.8 | 12 | -0,2 | -0.2 | |
| 2017 | 21.8 | 21.9 | -0,1 | -0.1 | |
| 2018 | -2.7 | -4.4 | 1,7 | 1.7 | |
| Average
|
12.48 | 10.77 | 1.71 | -1.31 | 13.28 |
As it is clear from the table given above, during the years in which the S&P 500 falls, dividend aristocrats have relatively much better returns: 13.28% better on average.
Although in rising years they make it weaker than the market, this has been happening mainly since 1999 when technology shares rose enormously. If we take out this year, the difference is only minus 0.17%.
Defensive qualities in a falling market are very important. Because most investors are easily fooled by behavioral risk, it is easier to implement a strategy that falls less than the market.
Since most companies continue to pay dividends in a recession, you earn on the shares regardless of how the share price goes.
But the most important thing about recession-resistant stocks is that they rise to a higher level after a fall. A stock that falls 20% must rise 25% to recoup capital. A stock that falls 10% only needs to rise 11%.
Large losses are very detrimental to the compound interest rate effect. Therefore, it is a very good idea and always have a clear idea of how much the investment may fall in value. This will require you to have a safety margin.