Everybody will agree that 2018 was an “annus
horribilis” on the market. The year-end results haven’t been that bad with the
S&P 500 total return of -4.38%, but the Ultra-Bear cult would rather remind
us that the S&P 500 lost 19.2% between September 20th and
December 24th (bear lovers always have the super power to identify
weird dates and ignore dividend payments to prove their point, don’t you
On the Canadian market, the TSX shows
-11.6% for the year, but if you use the XIU.TO (i Shares S&P/TSX 60 ETF)
total return, you get -7.82%. If you were Canadian and thought of investing in
USD, you probably made a good deal as the USD to CAD jumped by 9% in 2018.
Overall, we can say that we got a good
correction in 2018, but we are in a galaxy far, far away from what happened in
2008. Since nobody likes to lose money, I guess that we can understand why some
investors were upset. Now, the real question is: is there a way to avoid such correction?
What happens when you hit a correction? Nothing!!
Ah! You probably think that I’m about to
tell you there were clear indicators to sell at the beginning of 2018 and you
should have followed my lead, right? Not exactly. In fact, I see those
investors with the gift of clairvoyance like people telling you it’s going to rain
on July 1st. They may be wrong for the next 5 days, but, eventually,
it will rain. Then, they will claim “Ah ha! I was right the whole time!”.
But really, they just guessed the inevitable.
How many “experts” predicted the end of
this bull market in 2018? How many of them made the same prediction in 2017?
And 2016? And all the way back to 2012? If my 7 investing
principles clearly tell me I should buy shares of a company, do you
know what I do? I put my money where my mouth is and I make a transaction. How
come all those bear apocalypse fans aren’t shorting the market when it became
obvious that it was going down? I wonder.
What really interests me is what happens
when you hit a correction and you are fully invested. What is the real impact
on a market drop on one’s portfolio who doesn’t change his/her investment
strategy throughout the storm? In one word, nothing. Absolutely nothing. You don’t believe me? Let’s take a deeper
Mike, did you crack the code or something?
Last week, Dale from Cut the Crap
Investing asked me about my returns in 2018. He wanted to know how
my dividend growth investing strategy held up during the storm. Since I
invested my pension plan in 2017, I report my dividend
income on a monthly basis. Therefore, it would be very hard for me
to lie about how I did last year. During my last income report, I didn’t have
the final number from my online broker. Here’s how I finished the year with my
RRSP account (75% US, 25% CDN for $82,150) and my 2 locked-in RRSP (CAD and
- RRSP: +3.9%
- Locked-in CAD: +3.7%
- Locked-in USD: +7.5%
- Pro-rated return for all my
account together: +5.11%
So, while the market was down double-digits, I only posted positive returns. Did I crack the code? Am I a super investor? Hell no! Sorry to disappoint, I don’t have any special trading formula to share. I believe there are a few lessons to learn from 2018.
Here are a few observations on my returns
short term returns don’t mean anything. It doesn’t
really matter if I did well or not in 2018. Short-term returns are a result of
your strategy in place and luck. Did I just mention the “L word” in a serious
investing article? When you think about it, we have no control over what is
going to happen in the market. I have nothing to do with the fact I’ve picked
shares of Microsoft (MSFT) at $75 in fall of 2017 to see the stock surge up to
over $110 twelve months later. Real returns are the one you get from 5 years,
10 years, 25 years in the market. This is where luck fades and the strength of
your investing strategy rises.
the power of dividend growth investing is real. 97%
of my money is invested in dividend growth paying stocks (the remaining is in
Amazon (AMZN)). Companies showing a strong dividend
triangle usually perform well even when the market goes down. It
doesn’t mean they won’t get hurt, but when you combine a solid business model
and dividend payment, you usually have some protection against major market
drops. There are also faster to bounce back as investors realize their business
hasn’t been affected too much.
diversification matters, even more for Canadians.
In September of 2017, I decided to convert about 60K CAD into USD to invest
slightly over 50% of my pension account into the US Market. The exchange rate
was about $1.25 CAD for $1 USD at that time. It wasn’t the best deal you can
get, right? But beyond the exchange rate, I obtained an amazing
diversification. I use that money to buy companies such as Apple (AAPL), Disney
(DIS), Honeywell (HON), Microsoft (MSFT), Starbucks (SBUX), UPS (UPS) and Visa
(V). They didn’t all perform well in 2018 (especially AAPL and UPS!), but there
are no equivalent in the Canadian market. Instead of putting 20% of my money in
energy sector for example, I diversified my portfolio across various
Avoid dividend cutters
Another thing that matters when you invest
in dividend paying stocks is to avoid rotten apples. I’ve described how I avoid
cutters in a previous article. Companies axing down their dividend,
break their promise to their shareholders. While dividend cuts happen all the
time, 2018 was particularly rich with great companies (or popular one if you
prefer) taking away money from shareholders: General Electric (GE), Owen &
Minors (OMI), Buckeye Partners (BPL), L Brands (LB), Anheuser-Busch InBev
(BUD), Artis REIT(AX.UN.TO), Corus Entertainment (CJR.B.TO), AltaGas (ALA.TO),
A strong dividend growth investing strategy
combined with a close quarterly follow-up on each company could prevent that. My
methodology isn’t flawless. I’m not fully shielded against dividend cuts.
However, my DSR portfolios haven’t suffered a single dividend cut in more than
5 years of existence.
Focus on dividend growth stocks
The focus on dividend growth stocks brings
all kind of benefits;
- Diminishes sleep anxiety,
- Minimizes households’ arguments
- Enables early retirement,
- Improves your ability to smile
on a rainy day,
- And gives you that amazing skin
tone and this glow in your eyes (really, it does!).
Jokes aside, the focus on dividend growth
stocks discard most concerns you can have around the market. You feel
uncomfortable (read: you are quite upset!) when your portfolio loses 10K, the
first thing you do is to watch closely at your holdings. Then you notice most of your companies
increased your paycheck in the past 6 months. Why would management give you
more money when everything is collapsing? Maybe because it’s not that bad and
you panicked for nothing?
The secret of any successful investor; stick to your plan
A market correction doesn’t change anything
for a dividend growth investor because we all stick to our plan when it
happens. We don’t have to try to time the market to get out or get in at the
right time. We only have to consider using our dividends to buy more stocks of
those great companies when the price is down.
The market is now back up in early 2019.
Nobody knows if it’s a small jump before the big dive or if we are going to
surf some more time on this wave of optimism. In the meantime, I keep my money
invested in the market and watch those dividends grows. If you’re wondering
where to start, I’d suggest you watch
my webinar on how I invested 100K at the peak of the market in 2017.
The post What Happens When You Hit a Correction As a Dividend Growth Investor? Nothing! appeared first on The Dividend Guy Blog.