Dividend Investing Delivered in 2022, If Investors Stayed the Course
The S&P 500 ended 2022 on a somber note with a -5.8% return in December. Racking up a full-year loss of 18%, the market delivered its worst annual performance since the 2008 financial crisis.
Bonds delivered an even greater disappointment. A broad gauge of global fixed-income assets lost 15% in 2022, by far its worst return in more than 30 years as high inflation caused interest rates to surge.
Source: Financial Times
Dividend strategies performed relatively well against this backdrop.
The Dividend Aristocrats index slipped about 6%, and Schwab’s popular U.S. Dividend Equity ETF (SCHD) and our Conservative Retirees portfolio both edged down around 3%.
Luck played more of a role than skill for most dividend portfolios’ outperformance last year as the market rotated swiftly from growth to value stocks. But staying true to a conservative dividend investing strategy in recent years still required great discipline.
The frothy, stimulus-fueled environment that persisted throughout most of 2020 and 2021 created a temptation to chase price momentum. Investors’ risk tolerances seemed to increase almost as fast as trendy stocks soared. We saw that firsthand at Simply Safe Dividends.
Before 2022, it felt like not a week went by without hearing from first-time retail investors wondering if we could support syncing with trendy trading apps like Webull and Robinhood. And emails rolled in from folks who decided to turn in their stodgy dividend stocks for faster, easier profits offered by crypto and high-growth tech stocks.
High-profile investor Cathie Wood served as the posterchild of this frenzied environment.
Betting big on “disruptive” but unprofitable companies such as Tesla, Coinbase, Robinhood, and Teladoc Health, her flagship ARK Innovation ETF saw assets swell from $4 billion at the start of 2020 to $50 billion in early 2021 as investors bought into her “skill” in picking rising stars.
In the short run, the market is a voting machine. But in the long run, it is a weighing machine.
Ben Graham’s timeless wisdom proved true once more as the ARK ETF has lost over 75% from its peak with the bubble in speculative growth stocks popping. Since inception in 2015, our boring Conservative Retirees portfolio has now nearly doubled the once high-flying ETF’s total return.
Source: Simply Safe Dividends
One reason I like dividend investing is because you don’t have to be a genius to make it work. The strategy is as simple as buying a few dozen time-tested businesses with healthy profitability, strong balance sheets, and shareholder-friendly management teams.
We aren’t tasked with making hard calls on whether Tesla is worth $3,000 or $30 a share. Nor do we need to concern ourselves with what could happen in the market this year. Or the next one.
A diversified portfolio of fundamentally sound companies should enjoy consistent dividend growth over time – regardless of where stock prices head any given year. Our three model portfolios have demonstrated the predictability of this income strategy since they were started.
Source: Simply Safe Dividends
Investor anxiety remains high as 2023 kicks off. On the bright side, the S&P 500 has had back-to-back losing years just four times in the last 100 years (the Great Depression, World War II, the 1973-74 oil shock, and the dot-com bubble).
But this could be another one of those times as the Fed keeps raising interest rates to combat inflation. A recession may be the price to pay as companies reduce spending and layoffs increase in response to an uncertain economic outlook and tighter financial conditions.
I don’t know what 2023 will bring. While I’m not optimistic inflation will be cured without more pain, I have little confidence in my ability to make such forecasts or time the market. I’m much more confident about owning U.S. stocks over the long run and the power of long-term compounding achieved by holding high-quality businesses.
Companies begin reporting fourth-quarter earnings later this month and will share their initial outlooks for the year ahead. Our Dividend Safety Scores already take into consideration the possibility of a moderate recession, so we expect most of our ratings to remain stable even if the economy’s short-term outlook deteriorates.
That said, we will continue to monitor the environment as companies grapple with a unique mix of challenges, some of which haven’t been seen in a generation.
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