Dividends do matter. Memo from one of the Top 100 Investment Advisors in America.
John D. Spooner has been chosen by Barron's in 2006 as one of the Top 100 Investment Advisors in America. He is an Author, Managing Director, Wealth Management at Morgan Stanley and is the founder of The Spooner Group, based in Boston.
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It's always been amazing to me that fearful markets, Bear markets, are much more interesting than when greed is the ruling emotion. That's because greedy markets seem to pass out their goodies in unequal portions. Fearful markets seem to distribute the misery to everyone. Case in point: the dotcom era. As the Internet emerged at the end of the 1990s, the craze was on. And many clients called to say, "My neighbor's getting rich." Then this fad, and the bubble burst with many of these dotcoms vanishing from the Earth. That frenzy was greed. We avoided this hysterical period because we really couldn't tell what any of these companies were truly worth. If you avoided this bubble you were at first jealous, and then very glad you didn't participate.
In this current firestorm, with the Dow Jones main averages down over 5,000 points from the highs, the fear level is rising to roof levels. It's not panic yet as I write this, but serious damage has been done, if you are forced to sell.
People who really get damaged, in real estate, art sales, or stocks, are the people who are forced out because they need the money. If you're forced out, some rule seems to say that in this case, you'll get the worst price. Anyone who exited the markets in the meltdown of '08 and '09, and there were many, have probably regretted it ever since.
So where do we go from here? And is there anything else you need to know about the current environment?
First of all: dividends do matter. Many of you reading this are retired and partially live off the income that is produced by your accounts. For the last ten years or so, we have emphasized dividend paying stocks and virtually everything we have bought over this period has paid a dividend to you, often more than was being paid by 10 year US Treasuries. There was a specific theme for a reason. As I mentioned earlier, many of you live off of the dividends you receive and depend on that cash flow each month.
Here's the key to understanding this strategy: say that a mythical $1 million dollar account has declined in this firestorm to $800,000 and you spend sleepless nights worrying about the selloff. Everything else seems to get magnified as well, the state of the world, the government, the family, your health... the night sweats. Seldom do people connect a certain dot. Your dividend income, more than 3% on your stock's cost, stays at the $30,000 plus. The underlying stock declines, but your cash flow can be unaffected and you're not pressed to sell stock at prices affected by the anxieties around you. Companies have even raised their dividends during this volatile process.
As you watch the markets, another thing we'd like to emphasize is strategizing in this emotional climate. In ordinary market action, there are always sectors that outperform and others that are under pressure, out of favor. In times like now, almost everything is being tossed into the 'sell pile,' even if the companies are prospering in real life. All sectors are being punished.
In our view, this can bring with it great opportunity, if you take the long view and are opportunistic. If all market sectors are affected, (except cash), what we do is focus down on our ten favorite companies, companies with financial strength that pay strong dividends and where we feel that markets are punishing them unfairly. Businesses go through cycles and cycles are immutable. The earliest of the Rothschild's, commenting on cycles and value, was fond of saying as a contrarian, "When the streets of Paris are running with blood... I buy."
Recently the streets of Paris were running with protestors, and London is in disarray over Brexit. Every day we think we are seeing bargains in American blue chips and we can be paid while we wait for these values to prove themselves.
The last thought I'll leave you with is about relationships. We believe in real ones, not the virtual kind that robots and algorithms provide.
We feel privileged and grateful to have you as our friends and clients.
A healthy New Year to you all.
John D. Spooner
The Spooner Group