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What Happens When You Hit A Correction As A Dividend Growth Investor? Nothing!

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 superpower to identify weird dates and ignore dividend payments to prove their point, don't you think?).

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 look.

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 USD):

  • 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

First, 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 (NASDAQ: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.

Second, the power of dividend growth investing is real. 97% of my money is invested in dividend growth paying stocks (the remaining is in Amazon (NASDAQ: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. They are also faster to bounce back as investors realize their business hasn't been affected too much.

Third, 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 (NASDAQ:AAPL), Disney (NYSE:DIS), Honeywell (NYSE:HON), Microsoft (MSFT), Starbucks (NASDAQ:SBUX), UPS (NYSE:UPS) and Visa (NYSE:V). They didn't all perform well in 2018 (especially AAPL and UPS!), but there is no equivalent in the Canadian market. Instead of putting 20% of my money in the Canadian energy sector, for example, I diversified my portfolio across various industries.

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 dividend 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 (NYSE:GE), Owens & Minor (NYSE:OMI), Buckeye Partners (NYSE:BPL), L Brands (NYSE:LB), Anheuser-Busch InBev (NYSE:BUD), Artis REIT (AX.UN.TO), Corus Entertainment (OTCPK:CJREF) (CJR.B.TO), AltaGas (OTC:ALTGF) (ALA.TO), etc.

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 about money,
  • 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 grow.

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