It has not been easy to own stocks in 2022. The broader market is in sell-off mode and trading is generally volatile. Sleeping well at night has probably been hard if you check your portfolio regularly.
Thankfully, I've been doing alright through the various market ups and downs because I'm not focusing on stock prices (and I'm not overreacting to every little daily change). Instead, I'm paying more attention to the stocks I own that pay a dividend.
Here's how dividends have helped me to get through the bear market with my sanity intact.
What they are and can be
At its core, a dividend is your pro-rata share of the cash flow a company generates and chooses to pass directly to its investors. Dividends are a tangible return, providing you with cash that you can use as you see fit. For some, like myself, most dividends I receive get reinvested or set aside for investment in another security. For others, the dividend cash gets used to pay for living expenses (also known as a passive income stream).
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That's not the most exciting way of looking at the stock market, however, since stock prices tend to change far more rapidly than dividend payments. In fact, when markets are moving rapidly in either direction, bull or bear, the headlines will push even the most die-hard dividend investor to focus on stock prices. I have to admit that, during the worst of the bear market this year, I checked and saw that my portfolio had a drawdown in the six-figure space. It was not a happy moment, but I was able to shake it off by focusing on my dividends. Here's why.
Counting my checks
I don't just watch my transaction history to see the dividends I collect hitting my brokerage account. I have a spreadsheet where I track each company I own and the per share and total dollar value of the dividends I have received. Every month, I take my brokerage statements and put the new data into my sheet. My takeaway from 2023 is that, despite the bear market, my aggregate dividend check continued to head higher. That type of steady result is a great comfort when stock prices get so volatile.
Although no stock I own cut its dividend so far this year, such a move, or the concern of a dividend cut based on my review of quarterly financial results, would be my indication that something might need to change. Such companies are added to my watch list (and get an ominous red highlight in my dividend tracking sheet). Other than that, there's no need to worry about a company if it continues to pay me well. Thus, I can comfortably ignore, or at least try to ignore, market price swings for companies that just keep paying.
Using the dividend to buy more
Since I reinvest most of the dividends I collect, a bear market can actually be looked at as a positive. Indeed, a decline in price allows me to buy more shares with the dividends I get. I track this on my spreadsheet, too, so I can see that I'm buying more shares. Buying more shares, as it were, also means I will be collecting more dividends in the future, making it a double win.
A great example of this is North American pipeline giant Enbridge (ENB 1.71%), which has seen a fair amount of price volatility this year for what is basically a pretty stable business. At one point the stock was higher by 20%. At another, it was down almost 10%, for a nearly 30-percentage-point swing. That's pretty tough to watch, but seeing that the dividend not only remained stable but allowed me to buy more shares when I reinvested helped me look at the swing as a benefit, not a negative.
Valuable information
Then there are names like U.S. steel giant Nucor (NUE -1.04%) and globally diversified industrial stock Eaton, which have had incredible stock price runs in recent years. Their dividends have continued to advance as well. Since most companies don't like to cut their dividends, it's unlikely that a dividend increase from a longtime dividend payer will take place unless management believes that the new dividend level is sustainable. This brings up an important fact about Nucor and Eaton: They are both highly cyclical companies.
Watching the dividends and not the stock price keeps me from getting too caught up in the good times and the bad. Even Nucor's huge 23% dividend increase at the start of 2022 wasn't as exciting as it may sound, since dividend hikes prior to that point were in the low single digits for years (a fact I could see in my tracking).
What the big increase really told me was that the capital investments management is making have led to a sustainable step change in the company's earnings capacity. I was happy, but the information that was conveyed is what was important. In the end, when the market drops and these stocks go along for the ride, their sustained and still-growing dividends tell me there's nothing to worry about.
Not foolproof, but a good start
I can't say that I don't ever check the value of my portfolio. And it can be tough to watch the paper losses pile up during a drawdown. But switching my focus to dividends, which tend to be far less volatile than stock prices, helps me get through bear markets while also tempering my enthusiasm during bull markets. If you can just shift your perception a little bit, you can sleep better at night, too, no matter what's happening on Wall Street.
