I’ll start out by saying that I am a buy and hold investor of dividend paying stocks, now let’s put that aside and look at the recent events and see if buy and hold investment still a good strategy.
Over the last year we have seen:
- The US housing market crash and is continuing to fall,
- Major financial institutions failing,
- layoffs after layoffs causing unemployment to reach multi-year highs.
There have been record number of companies cutting dividends, companies that were thought to be “safe” and industry leaders are now fighting to survive the credit crunch, all this turmoil has me wondering if buy and hold strategy still is a strategy.
TSX/S&P composite lost over 800 points (over 9%) last week and closed below 8000 points below 2004 levels. South of the border things were much worse, the Dow Jones lost over 560 (over 7%) points and closed at 7300 below 1997 levels the S&P 500 very similar lost over 7% during the week dipping below 1997 levels as well. So basically if you had invested about 10 years ago in the US markets you are down, down after 10 years! That is a fairly long time.
Well let’s be fair if you invested in dividend paying stocks you could be better off, however the chances are that you have had a cut in your dividend income in the last year as well. Some of companies that cut dividends in the past 12 months:
Kingsway Financial
Bank of America
First National
Dow Chemicals
Citigroup
Husky Energy
Pfizer
This is just a fraction of the number of companies who cut their payouts. Last week the Associated Press reported $16 billion in dividend cuts in the first 50 days, payouts in January were down nearly 24% from last January. Many of them being companies with long and strong payout records. Another big one under pressure is General Electric (GE) who’s yield is over 10% and barely holding on to dividends.
This downturn has caused many to believe that buy and hold is probably a dead strategy, I must admit that the thought has crossed my mind from time to time as well, but the lesson to be learned here is not to be passive with your investments.
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Just because a company had good prospects 5 years ago, does not mean it still has good outlook. The industry may have changed, new management may have come in, new laws could also effect earnings. There are many things that can change the companies outlook and future earnings.
Constant research and review of your holdings is crucial, just because a company has a long track record of dividends doesn’t automatically make it a good company, although that is a very important part. What is the payout ratio? Is the company in a growing industry? Do the company’s earnings justify growing dividends? How much debt does the company have? These are just some of the basic questions to ask before investing in dividend paying stocks.
Just buying stocks for their yields without paying attention to any other factor’s is a risky strategy, Canadian capitalist has an interesting post on the danger of yield.
If you do your homework and due diligence there is good news, I believe the stock market has a sale! A sale we have not seen in decades, there is tremendous amount of value out there for the long term investor. If you look at historic data, markets are always on an uptrend in the long term. The Dividend Guy has taken a long term look at the Dow Jones and came to the same conclusion.
If you have the cash and time horizon it is a great time to get into the markets. Frugal Trader has a guest post with great tips on how to take advantage of the current opportunities.
I say let’s take advantage of this sale!
Related : Canadian Capitalist Keep Faith in buy-and-hold
Buying and Holding strong dividend paying companies is still my strategy, what about you? Do you believe in the strategy? How are you positioning yourself for the market turn around?
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I personally don’t think that the buy and hold strategy is dead, but that the demographic of investors has changed. More investors are now in the market for short term investing and quick gains. Whereas, previously we had more recession-survivors who were/are frugal investors. As well, with confidence level at unprecedented lows investors are afraid that holding stocks could just mean losing more value; hence the selling. If I had the cash right now I would definitely buy – because there is so much money-making opportunities in the market right now.
Recessionista: You are right it is obvious that many investors are currently worried about markets, I think those are many individuals that do not understand the market cycles fully and pay too much attention to mainstream media. Warrent Buffet is still buying!
Buy-and-hold strategy is dead if any of the following are true:
1) Actively manged funds, on average, outperform index funds. (If buy-and-hold is dead, surely, buy-and-flip is the way to go)
2) Over the *long-term*, the market is projected to have no (or negative) growth.
3) The fees and taxes associated with buying and selling are insignificant.
Otherwise, “diversify and hold forever” is still the best, surest way of growing your assets.
Daniel: I would say that pretty much none of those premises are true and I think your second point is what everyone investor should ask themselves, is the market negative from here till forever??
what is your strategy?
Ray: Of course the premises are false. My point was because the premises are false, “buy and hold” strategy is not only NOT dead, but it’s “the best, surest way of growing your assets.”
My strategy? Nothing major – index funds. 20% index bonds, 80% index equities. I’m working and saving as much as I can while the market is down. That’s pretty much it.
Buy and hold is still the best strategy.
If you had sold off stocks, it is unlikely that you will be actively investing now, no one knows when the stocks will go up for sure (marketing timing), but over time, you know that the market will go up.
But this is a good time to buy more stocks and index funds at bargain basement prices using dollar averaging or a few lump sums right over the next few months.
Just buying stocks for their yields without paying attention to any other factor’s is a risky strategy,
I done it before, and never will again.
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