While the phrase “Black Swan” gets thrown around a lot these days for events, the coronavirus and its spread could fit the real definition of the term. The virus has quickly grown from a small regional problem in China to and has the potential to become a global pandemic. Cases are now being found across the globe, the death toll has risen and new patients have contracted the virus without actually going to/coming from China.
Stocks have sold off hard over the last few weeks and entered into a correction. There are now plenty of worries about the fate of the global economy and the potential for a worldwide recession.
The truth is, although the coronavirus is a problem for the world’s economy, in the current and potential downturn, there are plenty of plenty of opportunities to buy stocks on the dip. And the reality is that the market often rebounds after these events subside.
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First reported at the end of December in the metropolis of Wuhan, China, the Covid-19 virus has taken on a life of its own. Thanks to the fact that the virus is particularly virulent in transmission, it has quickly spread around the globe hitting every continent except Antarctica. Cases have been reported across Asia, the Middle East, Europe and now the United States. All in all, the virus has infected nearly 90,000 people, with deaths totalling more than 3,000.
And the warnings about the virus continue to get more severe. The Centers for Disease Control recently advised that “Americans should prepare for the outbreak to spread within the U.S.”
With this, economic news has started to turn sour as well. Analysts and economists are now worried about the global supply chain, with firms like Apple (AAPL ) already warning that sales will fall, while costs are set to rise. All of this bad news comes at a time when the global economy is already starting to seem fragile. And, in fact, the coronavirus has caused the Organization for Economic Cooperation and Development to cut its focus for 2020 to just 1.5% growth as infections spread. Goldman Sachs predicts that many U.S. companies will realize no profit this year as the virus takes hold.
Naturally, the market has sold off hard on these fears.
Over the last week, stocks have seen their worst performance and biggest weekly drop since the Great Depression, and the major U.S. indices have now entered official correction territory, or a 10% or greater drop from a recent high.
Putting the Drop Into Perspective
The question now is what does this mean for investors going forward? The answer is a big fat…“it depends.” Looking at historical data, there’s really only two scenarios that could unfold. Just take a look at this chart from CNBC and Goldman Sachs.
What you are looking at is the 26 market corrections since World War II. According to the data, they have averaged a decline of just 13.7% and it took about four months to hit that point. The caveat comes down to whether markets enter so-called bear market territory. That is, if they drop more than 20%. Looking here, there have been 12 bear markets since World War II and they have averaged a decline of 32.5%. Worst still is that these bear markets have lasted 14.5 months on average.
Neither of those scenarios are wonderful for investor portfolios. But they do make the case for owning dividend stocks that much stronger. As we’ve long said, dividends are a great way to hedge market declines in that they provide a real return. After all, getting 3 to 4% in cash before anything else can reduce losses and even create gains during flat markets.
Moreover, reinvesting dividends during downturns creates a supercharged effect during upswings. With reinvested payouts, you are able to buy more shares for cheaper. When the market rises – and it will – returns are then boosted. Going back to 1970, roughly 78% of the total return of the S&P 500 Index can be attributed to reinvested dividends and the power of compounding those payouts. You’re looking at a difference of more than $1.3 million on a $10,000 investment over those 50 years when you reinvest the dividends.
And given that a correction rebounds on average in just four months and a bear market with 24 months, there’s plenty of time for compounding and additional reinvestment of shares.
Stay the Course & Get Ready to Buy
While the current decline can be scary, it’s better to think of it as a buying opportunity for dividend stocks. The truth is that dividend reductions/cuts remain rare events even during recessions and downturns. Going back to World War II and looking at downturns/recessions, the average dividend cut for the S&P 500 was just 0.5%. This proves that dividends remain steadfast during uncertain times.
Now could be the best time to refocus your portfolio towards income-producing stocks. The key is to focus on quality stocks with low payout ratios and good businesses. Coca-Cola (KO ) isn’t going anywhere and has a big moat. Microsoft (MSFT ) has a huge cash pile and strong margins. And these are just a few examples; you can use our dividend screener to find more.
Better still is that the recent downturn has made many of these top stocks much cheaper than just a few weeks ago. You’re getting a great chance to buy top names at bargain prices.
Use the Dividend Screener to find high-quality dividend stocks. You can even screen stocks with DARS ratings above a certain threshold.
The Bottom Line
The coronavirus is causing a major correction. But it’s here that dividends can continue to prove their worth. For investors, using the downturn to load up on quality stocks now can make sense in the long haul. Markets recover, and when they do, dividends will lead the way.
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