Stingy Investor Contact - Subscribe - Login
  Home | Articles | Screens | Links | SNW | Rothery Report
 
Is Dividend Income Safe?

After the collapse of the Internet bubble many investors turned to the relative safety of dividend income. At the risk of being labeled a "gloomy Gus", I have to point out that dividends aren't 100% safe. The intrepid dividend investor must be on the constant lookout for dividend cuts, inflation and high prices.

The list of ex-dividend-paying firms is depressingly long and littered with many fallen blue-chip stocks. For instance, Laidlaw, a past "Dog of the TSX", cut its dividend before slipping into bankruptcy a few years ago. Alternately, Bombardier rattled shareholders this year with a dividend cut.

Of course, it's easy to pick on failed dividend stocks. To get a better sense of dividend stability it is useful to turn to the broad markets where you can see how well dividends do during hard times and market crashes.

Robert Shiller's annual data on the S&P500 provides a good source of dividend information because it goes back to the 1870s. (During the early years predecessor indices were used.) Simply plotting dividends paid by the S&P500 on a graph would show impressive gains. However, such a graph would be misleading without taking inflation into account. Inflation is the rate at which the general level of prices for goods and services increases. Think of it this way, back in 1936 a youthful Warren Buffett was buying 6 cokes for $0.25 and selling them individually for a nickel. Young modern-day Buffetts would have to pay much more than $0.25 for a six-pack of coke and the same goes for other daily products. If dividends don't grow faster than inflation, then a dividend-oriented investor might have to cut back.

Figure 1 shows a plot of dividends paid by the S&P500 adjusted for inflation (based on the consumer price index). Thankfully, the overall trend has seen growth in inflation-adjusted dividends but there have been prolonged periods when dividends did not keep up with inflation. Based on the historical record, investors who rely on dividends for their retirement needs could be in trouble should they lack sufficient reserves for bad times.

Fig1

Figure 2 shows the percentage decline in inflation-adjusted dividends from their prior peak. For instance, inflation- adjusted dividends paid by the S&P500 reached a new high in 1911 but they then declined unevenly until they were reduced by 47.8% in 1920. The old 1911 high was only surpassed in 1929. As a result, an investor retiring in 1911, who needed full dividend payments to ensure a happy retirement, could have passed away before his dividend income recovered in inflation-adjusted terms.

Fig2

The next prolonged period of dividend distress began shortly after 1929. Starting from a new peak in 1930, dividends dropped by 46.3% in 1934, recovered a bit and then fell back to similar levels in 1946. It was only in 1956, some 26 years later, that the S&P500's inflation-adjusted dividend surpassed 1930 levels.

Ten years latter, and after a very good run, inflation-adjusted dividends hit another high in 1966. This time dividends fared better with declines of "only" 24.1% by 1975. It took some 24 years to break beyond the 1966 dividend peak in 1990.

The three down periods represent some 68 years of the last century. To be sure, you would have been unlucky to buy right at the top but 28% of the time the S&P500 has yielded smaller inflation-adjusted dividends ten years after purchase.

To put it in more practical terms, how would you feel if your dividend-based retirement income was cut from $40,000 per year to $32,000 or even to $24,000? You might be faced with the choice of selling stock, possibly during depressed market conditions, or switching from eating steak to tinned tuna. As a fan of frugal living, I enjoy tuna but I would also like to be able to buy steak.

Naturally, changes in stock prices tend to be even more extreme than changes in dividends. The lesson is not to avoid dividend stocks but to be aware that dividend income is not a guaranteed road to riches. In the end, it is important to remember that I remain enthusiastic about reasonably-priced dividend stocks. Just keep in mind that some of them will inevitably perform poorly.

Date: July 2005

More Dividends
  MoneySense Articles
 Cdn Top 200 2016
 US Top 500 2016
 Retirement 100: 2015
 Cdn Top 200 2015
 US Top 500 2015
 Retirement 100: 2014
 Cdn Top 200 2014
 US Top 500 2014
 Retirement 100: 2013
 Cdn Top 200 2013
 US Top 500 2013
 Retirement 100: 2012
 Buffett Buys
 FB IPO
 Stocks that pay
 Value in the S&P500
 Cdn Top 200 2012
 US Top 500 2012
 Retirement 100: 2011
 Where to invest $100k
 Where to invest $10k
 Summer Simple Way
 A crystal ball for stocks?
 Cheap & safe
 Risky business
 Cdn Top 200 2011
 US Top 500 2011
 Retirement 100
 Dividend investing
 Value investing
 Momentum investing
 Low P/E P/B
 Dividends
 Dividend growers
 Cdn Top 200 2010
 US Top 500 2010
 Graham's prescription
 Income 100: 2009
 The case for optimism
 Cdn Top 200 2009
 U.S. Top 500 2009
 Wicked investments
 Simply spectacular
 Income 2008
 Small stocks, big profits
 Cdn Top 200 2008
 US Top 500 2008
 Value that sizzles
 So simple it works
 Income 100
 No assembly required
 Investing by the book
 Cdn Top 200 2007
 US Top 500 2007
 Invest like the masters
 A simple way to get rich
 Top Trusts 2006
 Stocks for cannibals
 Car bites dogs
 Cdn Top 200 2006
 US Top 1000 2006
 So easy, so profitable
 Top Trusts 2005
 Dogs of the Dow
 Top 200 2005
 Money for nothing
 Yield of dreams
 Return of the master

MoneySaver Articles
 2 Graham Stocks for 2017
 3 Stingy Stocks for 2016
 5 Graham Stocks for 2016
 3 Stingy Stocks for 2015
 3 Graham Stocks for 2015
 3 Stingy Stocks for 2014
 4 Graham Stocks for 2014
 8 Stingy Stocks for 2013
 6 Graham Stocks for 2013
 9 Stingy Stocks for 2012
 8 Graham Stocks for 2012
 Simple Way 2011
 5 Stingy Stocks for 2011
 7 Graham Stocks for 2011
 Simple Way 2010
 5 Stingy Stocks for 2010
 8 Graham Stocks for 2010
 Simple Way 2009
 Timing Temptation
 19 Stingy Stocks for 2009
 4 Graham Stocks for 2009
 Simple Way 2008
 Active at Passive Prices
 Unbundling ETFs 2008
 5 Stingy Stocks for 2008
 5 Graham Stocks for 2008
 Is your index too active?
 Graham's Simple Way
 Canadian Graham Stocks
 5 Stingy Stocks for 2007
 8 Graham Stocks for 2007
 Top SPPs
 The Simple Way
 A hole in your IPO?
 Monkey Business
 8 Stingy Stocks for 2006
 Graham Stock Gainers
 Blue-Chip Blues
 Are Dividends Safe?
 SPPs for 2005
 Graham's Simplest Way
 Selling Graham Stocks
 RRSP Money Market Funds
 Stingy Stocks for 2005
 High Performance Graham
 Intelligent Indexing
 Unbundling Canadian ETFs
 A history of yield
 A Dynamic Duo
 Canadian Graham Stock
 Dividends at Risk
 Thrifty Value Stocks
 Stocks in Short Supply
 The New Dividend
 Hunting Goodwill
 SPPs for 2003
 RRSP: don't panic
 Desirable Dividends
 Stingy Selections 2003
 10 Graham Picks
 Growth Eh?
 Timing Disaster
 Dangerous Diversification
 The Coffee Can Portfolio
 Down with the dogs
 Stingy Selections
 Frugal Funds
 Graham Revisited
 Just Spend It
 Ticker Temptation
 Stock Mortality
 Focus on Fees
 SPPs for the Long Term
 Seeking Solid Stocks
 Relative Strength
 The VR Approach
 The Irrational Investor
 Value Investing

Globe & Mail Articles
 Indexing advice
 Media-shy stocks
 Curse of size
 Market uncertainty
 Be even lazier
 Scary beats safe
 Small, illiquid, value
 Use the numbers
 What value is good value?
 Sculpt for value
 Value vs CAPE
 Graham Rules
 CAPE vs PeakE
 Top value ratio
 Low Beta
 Value and dividends
 Walter Schloss
 Try unloved AIG
 Why I'm a value investor
 New world of ETFs
 Low P/Es possible
 10 yielders
 Be happier
 Long-Short
 Dividend Downside
 Shiller's P/E
 Copycat investing
 Cashing in on class
 Index roulette
 Theory collides
 Diving too deep
 3 retirement villains
 Scourge of inflation
 Economic omens
 Analyst Expectations
 Value stock scarcity
 It's all in the index
 How to pick good funds
 Low Beta Wins
 Hunt for dividend stocks
 Think garage sale

Advisor's Edge Articles
 Passive Rebundling
 Doing the math

Norm Speaks
Flip Books

Tools:
 Asset Mixer
 Periodic Table
 ETF Fee Calculator



 
About Us | Legal | Contact Us
Disclaimers: Consult with a qualified investment adviser before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, financial advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...