A question alot of folks ask about dividend stock is that they aren’t realy defensive when a bear market comes along as the share price will still go down. It would be more worth while to sell then buy back at cheaper price.
What do i think of this kind of move? I am all supportive of it, IF you can foretell future events and price movements well.
Lets say you trust your skill in analysis whether it is fundamental or technical. You see that in the future this stock will go down together in a bear market. How well would you fare?
I created a Dividend Stock Simulation Spreadsheet here to illustrate and analyse this.
I chose CapitaCommercialTrust which is a commercial property reit listed on a stock exchange.
Those lines marked in red are prices where stocks of CapitacommercialTrust will be purchased. On every of these prices stocks will be purchase in this simulation. The question is how much.
Assuming that we would like to divide 20000 shares between these purchase periods. Base on a pro investor who is able to foretell that the trend is down he would likely to add more a 90cents, 64 cents and 78 cents. He will purchase less at 1.84,1.27 and 1.19.
Very clear in the last column that should you buy at a high price of 1.90 compare to 1.19 now you lose 46% and if you are a stock god and purchase at 64 cents you win 57%.
Do note that during this period, dividend have been distributed. This is why we invest in div stocks for.
The Interval Dividend Since Last purchase illustrates the amount of div declared since the last entry. this is to say between 26 jun 07 to 3 jul 08, $0.04 of dividend was distributed.
The more shares you have the more dividend you make and Div Paid per batch illustrates that.It is the div received for that interval times number of cummulative shares you have.
This move you made have been good.Your total dividends earn till now is 3k which is a return of 15%.
Although you are still far from the high of 1.90, you still make money on capital appreciation since you accumulate more at a lower price.
What happens when you guy more at a higher price? We will illustrate this by showing someone who bought more at 1.84 and 1.27 and got so desponent that he added less on the way down.
Compare to the previous guy, this guy needs to spend more to accumulate the same amount of shares(28k vs 19k). But his dividend is larger since he got more shares early.
But holding it comes as a high cost as high unrealize capital loss is 7.8k. in all he is still 4.1k down.
What happens to a guy who does not think so much but adds roughly the same amount each time?
For a guy averaging in, his cost is not as high as 28k (22k) and his loss is far less. But so are his dividend earn since he actually had less than the guy who added most in at 1.84.
So what can we learn from all this?
- If you are good at TA or FA you stand to benefit more. Having a great crystal ball is great as you can sell at a high price and buy back at a lower price. Having good FA will enable you to uncover good dividend yielders but at the same time know whether they are overvalue (buy less) and undervalue (buy more).
- Dividends offset losses or supplements gains. Here we see the last guy who more or less average in covers his losses and ends up being in a positive position due to his dividend despite having 10k of exposure above current price.
- The more stocks you accumulate, and the stronger your dividend stock, you accumulate more dividends. This is why it is important to find the stocks that can continue to pay you well. for that to happen you need to understand its valuation, business model, operating environment and its dividend paying capabilities.
- Holding on blindly when you can see that things are not working out in the larger picture can really kill your portfolio not to mention your psychological capital.
- It is difficult to foretell the trend of the market. Because of this selling to stop (4) is difficult as well.