Let's not beat around the bush: So far, 2016 has been a stock market disaster. Investors are running around like chickens with their heads cut off, selling with absolute abandon. With income investors on a more heated hunt than ever for secure and steady returns, here's what you need to know about dividend stocks in 2016.
Taming the Asian tiger
Of all stocks hit hard so far this year, Chinese equities take the crumble cake. From Jan. 1 to Jan. 7, the Shanghai Composite Index (INDEX: ^SSEC) plummeted 11.7% -- and that was even with two automatic trade suspensions.
In times of volatile markets, many investors look to dividend stocks. So far for 2016, the SPDR S&P 500 Index (IVW -0.07%) is down 5.8%, while the SPDR S&P Dividend Index (SDY -0.45%) has dropped just 5%.
In 2015, the opposite was true. Dividend stocks lagged the overall market , with the energy sector taking an especially hard hit. Freeport-McMoRan (FCX -0.21%) ranked among the worst dividend stocks of 2015 after its copper, oil, and gas assets all simultaneously crumbled in complementary value and demand. Even growth dividend stocks, that investors had bid up in expectation of astounding earnings, hit hard times. Like Freeport-McMoRan investors, Energy Transfer Partners, L.P. (ETP) shareholders saw their investment lose more than half its value in 2015. Low demand, contract crunches, and commodity price squeezes all helped bring this growth dividend stock down.
In 2016, dividend stock investors may have to watch out for higher valuations if growth stocks go out of fashion. But that shouldn't necessarily deter long-term thinkers from dividend stocks they'll be holding for years to come.
Graphs like the one above are exactly what investors shouldn't be watching. Trying to time market movements or, even worse, jumping in for short-term trades, can be disastrous. As an individual investor, your single largest competitive advantage is your long-term horizon -- use it.
An interest(rate)ing year
In December 2015, the Federal Reserve did something it hadn't done in nearly a decade : It raised the federal funds rate. On the back of an ever-improving economy, Fed Chair Janet Yellen bumped the target range from 0.00%-0.25% to 0.25%-0.50%.
In 2016, policymakers have made it clear that investors should expect up to four more interest rate hikes, with a rate of 1.375% forecast by the end of the year. That looming increase will be neither a surprise nor a problem for dividend stocks in 2016. The hike will make borrowing money more expensive, but it applies universally and may bring some welcome hesitancy to what has been a post-recession spending spree. As Yellen put it:
"Americans should realize that the Fed's decision today reflects our confidence in the U.S. economy. While things may be uneven across regions of the country and different industrial sectors, we see an economy that is on a path of sustainable improvement."
Dividend stock investors need look no further than real estate investment trusts (REITs) to see the relative power of an improving economy versus interest rate bumps. Due to both their business model and tax breaks, REITs are known for their massive dividend yields. In 2015, despite increasing talk of (and ultimate action on) rate hikes, REITs took nine of the top 15 spots for growth dividend stocks. Their performance was a far cry from the sector-specific plummets experienced by Freeport-McMoRan and Energy Transfer Partners, L.P. That's because ultimately, nothing improves the overall stock market as much as an improving economy, and nothing hurts it as much as a declining one. So when worriers whisper interest rate rumors into your ear this year, ignore them -- the secret's out and it's no surprise to the stock market.
A return to reliability
Whether the market soars or stumbles in 2016, investors should continue to focus on building out their diversified dividend stock portfolios. Avoiding overexposure to any one sector or country, continuing to steadily invest through ups and downs, and taking macroeconomic indicators for nothing more than they're worth will guarantee that 2016 is as a good a year as it can possibly be for dividend stock investors.