Weathering Market Risk With Dividend Stocks

May 12, 2015

by Clint Harris

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Imagine standing in Provincetown, Massachusetts, on Route 6, facing a road sign that says 3,652 miles to Long Beach, California. You are about to begin one of the most audacious cross-country road trips in the United States. At first, you’re thinking about your destination: beautiful sunny beaches and perfect weather year-round. Then the questions hit you: “How am I going to get there? What could happen along the way? Is my car in good shape? Am I prepared? … I need a plan.”

Planning for retirement is like driving Route 6. You have a long way to travel and many great memories will be made along the way — but you can’t reach your destination without a well-thought-out plan. I know from going through this process with my financial adviser that retirement planning can be a rewarding activity, but there is a lot for you to consider. In this blog series, I’m going to focus on three of those considerations — market risk, income needs and longevity — and examine why dividend-paying stocks are an important asset class to consider for navigating these potential road blocks and helping to fuel your retirement journey.

Road trip weather forecast: A chance of market volatility

On your retirement road trip, market risk is like the weather. Sometimes it can work in your favor with long periods of attractive returns and not a cloud in the sky. But prudent travelers should expect the occasional storm and be prepared for bursts of heightened market volatility.

Dividend-paying stocks can help investors manage market risk by providing relatively conservative exposure to the equity market. This means they can help temper volatility along the way, potentially creating a smoother ride for investors. The historical beta (a measure of market sensitivity) of dividend growers is 0.86, versus 1.12 for non-dividend-paying stocks.

Taming the bears

Stocks that have initiated or grown their dividends have historically been less volatile than non-dividend-paying stocks. This chart shows the historical beta of S&P 500 Index stocks, based on dividend policy, relative to the index as a whole. Data is shown over the rolling 10-year period ended Jan. 31, 2015.

Staying the course

There are two main reasons why smoothing market volatility can be a benefit to investors:

First, losses can have a disproportional effect on portfolios when compared with gains. For example, if the market falls 20%, you need a return of 25% just to break even. If your portfolio loses less than the market, then you won’t require such large gains to meet your ultimate goals.
Second, if road conditions get too bad and drivers fear they’re not prepared to weather the storm, they risk giving up along the way. Oftentimes, this means investors may get out of the market when conditions are near their worst — and miss out on the market’s subsequent recovery, which is when some of the largest returns can occur.

Ultimately many investors want a smooth ride during their retirement road trip, and I believe dividend value investing can serve as a conservative base to your retirement portfolio, helping to temper the bumps along the way. Invesco’s Dividend Value Team oversees $12B in assets for shareholders and manages two distinct approaches. Invesco Diversified Dividend Fund is managed to serve as a conservative foundation to one’s equity portfolio. While the fund can invest in dividend payers as well as dividend growers, our process emphasizes total return with dividend growers. Invesco Dividend Income Fund compliments a traditional income portfolio by investing in companies with attractive yields.

In part two, I discuss how different approaches to dividend value investing can help with your changing income needs during your retirement journey.

J. Clint Harris II, CFA

Senior Client Portfolio Manager*

Clint Harris is a senior client portfolio manager representing the Invesco Diversified Dividend team. Before he was promoted to his current position in 2008, Mr. Harris was senior product manager in Product Strategy and Investment Services, focusing on the core equity complex.

Mr. Harris joined Invesco in 1999 and was an investment specialist responsible for internal and external asset manager due diligence for the firm’s institutional and retirement businesses. Subsequently, Mr. Harris joined AIM Private Asset Management where he worked as a portfolio advisor for the firm’s separate account portfolios.

Mr. Harris earned a BA degree from Oglethorpe University in Atlanta, with a dual major in economics and marketing and a specialization in international business. He holds the Series 7, 63 and 66 registrations and is a CFA charterholder.

*Does not manage the assets for any fund.

Read more articles by Clint Harris on Invesco Blog.

Important information

Invesco Diversified Dividend Fund’s investment objective is long-term growth of capital and, secondarily, current income.

Invesco Dividend Income Fund’s investment objective is current income and long-term growth of capital.

Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer’s board of directors and the amount of any dividend may vary over time.

In general, stock and other equity securities values fluctuate in response to activities specific to the company as well as general market, economic and political conditions.

The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

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All data provided by Invesco unless otherwise noted.

Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC (Invesco PowerShares). Each entity is an indirect, wholly owned subsidiary of Invesco Ltd.

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Weathering Market Risk With Dividend Stocks