Dividends: to be or not to be? (episode 1)

Standard deviation is one of the measures of the volatility of a financial investment.. The relative standard deviation is expressed as a percentage, like the performance. In 95% of cases, the lowest annual performance is equal to the mean performance minus twice the standard deviation. Conversely, in 95% of cases, the highest annual performance is equal to the mean performance plus twice the standard deviation.

For example, let's take a stock that has an average annual return of 8% with a standard deviation of 12%, which is typical of a good dividend payer with a growth rate. The maximum annual return you can expect is 8 + (2 x 12) = 32%; the minimum annual return is 8 - (2 x 12) = -16%. In other words, in 95% of cases its annual return is between -16% and +32%. In 67% of cases, or two years out of three on average, it is even between -4% and 20%. And since you don't put all your eggs in one basket, the overall volatility of the portfolio is even lower!

In theory, it is possible to make a significant loss by buying at historical highs, just as it is possible to make substantial capital gains by buying at historical lows. The probability of falling into these extremes is however low. By avoiding stocks with a yield that is too low (or a P/E ratio that is too high), you will avoid buying at the worst time. In doing so, most of the time, you can expect to make a loss that remains less than one standard deviation, or 12%, with these types of stocks. Even less for some.

For illustration, In 2002, non-dividend-paying stocks fell by 30.3%, while dividend-paying stocks fell by only 10.9%.. Colgate gives us a good illustration of the low volatility of stocks that offer growing dividends. The stock held up particularly well during the crises of 2008 and 2011.

Beta is another way to measure volatility.. It indicates how closely a stock tracks a particular index. A stock with a beta of 1 tends to track the S&P 500 Index closely. With a beta of 1.3, for example, it moves up or down 30% more than the index. With a beta of 0.9, it moves up or down 10% less. Over the past five years, the average beta of U.S. dividend stocks was 0.98, while that of others was 1.50.

Conclusion

Wharton University finance professor Jeremy Siegel explored the importance of dividends in his book The Future for Investors. In bear markets, Dividends act as a buffer against losses by generating income.. By reinvesting these, the individual shareholder will hold a greater number of shares, which will have a leverage effect in periods of market growth. Example with Johnson & Johnson: purchase of 13 shares for 2000 USD in 1980. Thanks to the divisions of the nominal value and the reinvestment of dividends, the investor holds 2,000 shares in 2007 for a total valuation of 140,000 USD.

LThe increasing dividend method allows you to obtain particularly interesting returns with a little patience. By reinvesting them, not only do you further improve this return, but you can even benefit from a market decline. Let's not forget that the dividend investor focuses first and foremost on the income he can obtain from a security. With this in mind A temporary market decline, as was the case in 2008 and 2011, represents an opportunity to obtain more dividends at a lower cost.