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
Husky Energy

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.

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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Ray is an ex-financial adviser and the founder of Financial Highway. Currently working in the financial industry and working towards completing his Chartered Financial Analyst, CFA, designation.