Tuesday, July 2, 2013

Riding Out Market Volatility With Dividends

UntitledI remember long ago when I owned mutual funds, any dramatic dip in the markets would make my stomach turn. Our family advisor told me I should be buying more units while the price was down. I could never wrap my head around buying more of something that could lose value so quickly. To me it was a practice that went against all logical thinking.


If you’ve been following The Loonie Bin, you would know that I was actually hoping for a large pull back in the markets this year so I could buy MORE stocks for my portfolio. What investor in their right mind actually hopes for stock prices to drop you ask?; this guy! Dividend investing has opened a whole new world to me that no other investment strategy could offer. While other investors panic and jump ship, I’m content to ride out the panic in my “life raft” of dividend income that keeps coming in no matter what the markets are doing.

The Beacon of Increasing Yields

As quality dividend stocks begin to decrease in value, the yield begins to increase which creates a more tempting offer to other investors. The higher the yield, the better the return on an investment with each dividend payment. As more investors purchase shares, the share price increases. It’s almost like a built in defense mechanism that softens the blow and eventually corrects itself.

Not all dividend stocks are created equal, which is why I only invest in quality companies with a proven dividend growth track record. If you seek out stocks based on yield only, then a falling stock price might turn into a painful and expensive ride all the way to bottom. You may wonder what happens if all the markets free fall into oblivion due to some economic collapse, and you and everyone’s life savings are toast? Well rest assured if that ever happens, your money is the last thing you need to worry about. At that point I’ll be headed out of town with some toilet paper, bottled water and as much beef jerky as I can carry.

Almost Guaranteed Return

Unless a company cuts their dividend all together, you are 99.9% guaranteed a return on your investment no matter how your portfolio performs. Most people who invest in mutual funds or regular stocks often say “They are up 15%” on their investments. The truth is, they would need to sell their units or stocks to actually obtain that 15% increase.

The markets could be down 30% and I would still receive over a 5% return on my investments; that’s the true beauty of dividend investing. It gives me peace of mind while the other investors are running around in a panic. As the dividends are deposited into my account, I have a tangible return on my investment without ever having to sell.

Compounding My Way to The Top

I remember the absolute joy I felt when I witnessed my very first dividend payment deposited into my trading account. A whole $85 for doing absolutely nothing but having the courage to start investing myself. Since then my dividend income has grown and if things remain as they are, I stand to make over $5400 in dividend income this year. As I re-invest the dividends, I buy more dividend paying stocks, which pay even more dividends down the road. Slowly over the first few years, but noticeably faster now as I can purchase more and more shares as the dividends coming in increase. This compounding effect will continue to the point that I wouldn’t even have to contribute my own personal capital to keep investing. Of course I would always want to contribute more capital each year, but it’s nice to have that option.

Good Enough For Me

I know dividend investing isn’t the be all-end all of investing but it sure suites my needs. No matter which way the markets turn, I can get a good night’s sleep because I know my money is invested in quality companies aren’t going anywhere anytime soon. As those companies increase their dividend, my yield on cost will also increase which means I’ll be making more money no matter which direction the markets turn. As a dividend investor, I actually look forward to market corrections and pullbacks so I can buy in at lower price points. It actually makes sense to me to buy more shares while the price is down, unlike before with mutual funds. So go ahead stock markets, be as volatile as you want; my dividends have got me covered!


This article was written by The Loonie Bin. If you enjoyed this article, please consider subscribing to his feed.

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