Dividend Payers To Power Through A Recession

The stock market has once again shown that the days of nerve-wracking volatility are not over. Economic growth in the developed world remains sub-par to say the least and many still believe that most of the stock market here is propped up with easy money from the Federal Reserve.

I have no doubt that most stocks will indeed perform terribly if the Fed finally does decide to raise interest rates. Even if the Fed does not raise interest rates, the U.S. economy (which is still sluggish) can drop into recession at any time.

We do have recent history to help guide us in terms of which companies can weather the storm of a recession and even keep their dividends growing. In the major downturn and recession of 2008-2009 there were actually several dividend-growth stocks that increased their dividends. These companies generally are non-cyclical in nature and sell staple items that people will not give up even in a recession.

I want to look at three such companies today. The are Johnson & Johnson (JNJ), Wal-Mart (WMT), and Altria (MO).

Let’s take a look at what makes companies like these such a solid investment for retirement portfolios.

What is amazing about these three companies is how they increased their dividends during the dark days of the last recession. Not surprisingly, their stock prices performed much better than the S&P 500, which fell 15% during these two years.

There are three benefits to finding companies such as these: 1) Their dividend payments keep on rolling in, even in recessions (and sometimes even with dividend growth) 2) The stock prices do not decline as much as most equities in a recession and 3) the volatility of solid dividend-growth stocks is much lower than indexes such as the S&P 500.

I want to stick with the fact that dividend-growth stocks like the ones being discussed here are much less volatile over time. In this very informative article  the author shows that dividend-growth stocks have volatility levels that have historically been about 33% lower than non-dividend paying stocks. This makes sense because, in general, dividend payouts are much more stable than equity prices. If a stock derives, say half, of its return from dividends, then the volatility of its total returns will likely be much lower than non-dividend payers.

Given this, I looked at two separate portfolios in our retirement planner. The first portfolio invested only in an S&P 500 index fund. The volatility (standard deviation) for the S&P has been about 16% over the past 10 years.  I then replaced the S&P 500 fund with my dividend-growth stocks. I lowered their standard deviation assumption by 33%. So the standard deviation for my dividend payers is 10.7%.

In a typical retirement plan I find that the probability of success increases by about 20% when switching to less volatile dividend-growth stocks. This is a large jump, solely due to the fact that they are now invested in more stable, solid dividend paying stocks instead of an equity index fund.

Another huge benefit to investing in dividend-growth stocks for retirement is that the principal value of dividend-growth stocks becomes nearly meaningless if held long enough because their dividend payments become the major portion of the total return over time. So fluctuations during recessions do not impact investors nearly as much, either monetarily or psychologically.

Each person and couple has a different situation and might need to change a variety of things in order to meet their retirement goals. But it is usually impossible to tell whether or not you can retire when you want until you sit down and actually run through the numbers. At that point you can begin running interesting scenarios that will tell you what you need to do to get to your goals.