Fixed in the memory of many investors are two momentous bear markets: The tech bubble in 2000 and the fi-nancial crisis of 2008. Both were uniquely painful. It’s been 7 years since the 2009 market lows now, where does the time go? The S&P 500 has been on a strong run for those 7+ years and now hovers close to all-time highs. Yet some investor’s outlook continues to be filled with pessimism and fear. One common worry is that another bear market might be right around the corner. Does flirting with new highs on the S&P 500 mean investors should expect a peak OR that investors should expect higher highs in the quarters to come? Market corrections are always a possibility, but it is uncommon to have a bear market without a recession. Investors that became too fearful and sold stocks prior to the fallout from Brexit, the possibility of the Fed raising rates or the uncertainty around upcoming U.S. presiden-tial election, missed some solid gains in the third quarter.

The third quarter turned out well for stocks and other risk assets around the world. A strong Q3 may have caught investors off-guard after Great Britain surprised the world by voting to leave the European Union on June 23, 2016. You may recall that stock market volatility picked up and most major markets were down during the first 2 trading days after the vote when the media compared “Brexit” to the collapse of Lehman Brothers in 2008. Often the initial doomsday reports can deviate greatly from reality. The U.S. stock market for example, recovered almost all of its Brexit decline in just 5 trading days.

During the quarter the U.S. dollar weakened against several developed market currencies. We expect some sales and profit relief for U.S. companies that are export dependent in the coming quarter. Financial results of U.S. companies that we follow have been hampered by a strong dollar over the last several reporting periods. For the quarter, emerging market equities meaningfully outperformed developed market counterparts (+7.7% compared to +4.8%) and have now outpaced developed countries over the last 12 months by almost 3%. Emerging Asia (+8.9%) led by the Chinese stock market (+13.9%) had a robust quarter. U.S. investment grade bonds returned +0.46% as the low interest rate environment persisted, while U.S. stocks gained +4.0%, as measured by the Russell 1000 Index.

We continue to see opportunities in the increasingly uncertain backdrop of the election and potentially higher interest rates. Our primary investment strategies take into account our world view. One of our strategies that has provided strong, risk-adjusted returns so far this year, focuses on companies with growing dividends.

Refresher Course: IMS Dividend Growth Strategy

We know an investor’s ability to handle uncertainty is directly correlated to the probability of achieving their financial goals. We see plenty of investors going broke safely by investing long-term money in “safe” investments such as cash, CDs and bonds which generally pay less than the rate of inflation. Investing in strong companies that routinely pay and boost dividends reduces the uncertainty about investment returns. Investors expect their stock portfolios to grow from capital appreciation and dividends, the combination is called total return. Some investors rely on capital appreciation for the majority of their total return. The problem is there can be long periods of time with little appreciation. We suggest a better approach is to tilt stock portfolios toward dividend paying stocks with a track record of generous dividend increases. Our approach to dividend investing is based on decades of research and evidence that suggests over the long run dividend paying stocks outperform both non-dividend paying stocks and the broader equity markets over full cycles. The research is more compelling for stocks that consistently increase dividends compared to high dividend stocks that aren’t as committed to dividend growth.

Did I mention dividend paying stocks tend to outperform over the long-run with lower levels of volatility?

In a nutshell our dividend strategy targets a dividend yield that exceeds the yield of the S&P 500®. More important than the current yield is a company’s ability to grow their dividend at a rate of greater than 10% per year. The strategy limits exposure to traditionally popular sectors such as utilities and telecom. These sectors have weak earnings growth potential and limited ability to increase dividends.

Let’s review the performance of two popular indexes through a historically volatile market period. An investment in the S&P 500® on October 31, 2007 didn’t recover from the Financial Crisis until August 6, 2012. An investment in the S&P High Yield Dividend Aristocrat index recovered 600 days sooner (December 14, 2010). The S&P High Yield Dividend Aristocrat index yield in October 2007 was 3.3% while the S&P 500 yield at the time was 1.75%. In addition, the S&P 500 was 18% more volatile than the S&P High Yield Dividend Aristocrat index.

Let’s review another volatile period, the technology bust of 2000. The performance figures are even more compelling. From August 31, 2000 to January 31, 2003 including dividends the S&P 500 lost 41% while the S&P High Yield Dividend Aristocrat index rose 10.6%.

Let’s oversimplify a market cycle to include an up, sideways and down period. It’s typical that in the sideways and down periods the dividend strategies outperform while only trailing modestly during the up periods. A strategy that emphasizes dividend growth improves the probability of higher returns and lower volatility in turbulent times.

We think strategies that emphasize dividends make sense for long-term patient investors that want a better balance between income and appreciation potential. We know that stock appreciation can occasionally be elusive for periods as long as a decade, for example the 1930s and the 2000s. Dividends function as a critical component of the total returns for stocks. Dividends account for approximately 40% of U.S. stock market returns since 1930. Sustainable and growing dividends help to hedge the income stream against inflation. We know inflation has been absent for the U.S. economy since the financial crisis, but has a long history of coming back to the party.

Financial Planning Corner

Successful financial planning entails people taking control of their financial future. People don’t generally plan to fail, they simple fail to plan. At IMS, we have financial professionals prepared to work with clients to develop, implement, and adjust financial plans. Almost everyone wants to see their investable assets “RISE” and we utilize the following “RISE” framework in Financial Planning:

  • Retirement Needs. We work with clients to develop the amount of assets/income needed at retirement to meet the desired lifestyle for their retirement years. We take into account risks such as inflation, market volatility, ever increasing life expectan-cy, and other unexpected life events.
  • Investment Strategy. We develop the appropriate investment strategy and asset allocations based on the client needs, comfort levels regarding risk and where they are in the asset accumulation stage versus income generating stage of their lives.
  • Savings. Many clients underestimate how much they will need to have saved in order to meet their desired retirement lifestyle. For example, a $1 million retirement nest egg will last a retirement couple 30 years, based on taking out $50,000 a year adjusted for inflation at 3.5% and earning a steady 6% annual return. We provide assistance to those clients that desire help with respect to budgeting and saving the desired level.
  • Execution. Executing the plan requires discipline, follow-up and adjustment based on ever changing needs, results and risks. We provide the ongoing review necessary to help manage and modi-fy the financial plan over time.

Our financial planning professionals receive on-going training on some of the industry’s most sophisticated software so that we are prepared to help you with your planning needs. Please do not hesi-tate to contact us if you would like some help with financial plan-ning or year-end tax planning. We are here to serve you. As al-ways, we thank you for your trust and your business. Our dedicated staff of eleven is here to help you achieve your goals and we are committed to building wealth wisely.


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