This morning, the S&P 500 is down almost 6% YTD, and almost 10% from the recent highs in early February. If you read yesterday’s post, you know that as investors we need to expect pullbacks in our wealth-building journey. But it still hurts.
Why does it hurt? We’re not pulling our money out of equities today, or next week, or next year. If we’ve done our asset allocation correctly, money we need in the next 5 years is in cash and fixed income. Equities are having a rough go of it, but the equity market will likely be in better shape in 5 years. Why do I think this? Because in most 5 year periods the S&P 500 has grown in value. Read more here.
But It Still Hurts
We all get it, but it doesn’t change the fact that it is unpleasant to see our market value fall by 6%. All those investors who say they look forward to pull-backs because everything is on sale, are full of crap. It hurts.
Our heart tells us this, not our brain. We invest in equities because over the last 100 years, the S&P 500 has gained on average 10% per year with dividends reinvested. While our brain knows this, our heart ain’t buying it.
Perhaps A Nice Dividend Will Help?
Yes, please!
I’ve written a bit about dividend stocks. For a refresher read CHRISTMAS IN MARCH, A DIVIDEND STORY.
Many mature companies pay a dividend. Companies that bring in a lot of cash – take Walmart for example, with all those registers in thousands of stores throughout the world – how much cash do you think they bring in each day, week, year?? Quite a bit. More than enough to pay the workers and build a new store here and there, but there is a lot left over. This leftover cash goes to the owners. And if we own shares (even just a few), that’s us. We get a dividend payment.
In the Christmas in March post, I wrote about waking up one day and finding an extra $814 in my brokerage account. Pretty sweet. Read the post for the exciting details. I won’t rehash it here.
The point is that it is nice when the dividend shows up.
Especially During a Pullback
In 2023 and 2024, the S&P 500 was up over 20% each year. The market was humming along and the dividend was a nice surprise; icing on the cake.
No cake for you this year.
We’re down almost 6%.
Cha-Ching
Yesterday, the nice folks at Prudential sent me $604.
While this doesn’t come close to making up for the paper losses I see when I log in, it absolutely makes me feel a little better. And by the way, I also got $262 from Con Edison this morning. Thank you.
Prudential
Aside from a big jump in 2021, Prudential’s stock price hasn’t moved that much. It wandered down to 79, and up to 128, but it’s at 105 today which is about in the middle. Prudential is not likely to set the world on fire, but it’s been around for a long time, it’s got a healthy balance sheet, and it has a long history of paying a dividend. And the dividend is now $5.40 per share, which is a yield of 5.14% at the current price.
If you look back at last year’s post, PRU paid $5.20 per share. That’s a nice little $0.20 bump. It’s even more fun to see our dividend growing each year.
Back to the chart. Look at the little Ds on the bottom. That’s when PRU paid a dividend.
Reinvesting
I’m a huge fan of reinvesting dividends. When we buy a fund or stock, we have the opportunity to tell our brokerage company whether we want to take the dividend in cash or reinvest in more shares. And we can change our minds at any time and switch this online.
At some point, I plan to take my dividends in cash to fund my spending, but I’m not quite there yet. So all my dividends are used to buy more shares. So yesterday, Fidelity nicely purchased an additional 5.705 shares for me with the dividend proceeds.
The great thing about this is that it is an automatic investment plan. Every quarter, I buy more shares of Prudential regardless of the price. Look at the Ds in 2023. I was buying shares for less than $80. What a bargain.
Mutual Funds
For those who don’t want the hassle of researching companies, or don’t want to take the risk of buying individual stocks, you can buy a nice low-cost mutual fund that pays a reasonable dividend. Check out Fidelity High Dividend ETF (Ticker: FDVV)
It has an expense ratio of 0.16%, which means you pay $16 for every $10,000 invested. Pretty cheap for a nice basket of equities that contains:
It pays a 2.85% dividend so you’ll get $2.85 annually for a $100 investment, or $285 per year for a $10,000 investment.
Wrap-Up
Market pullbacks stink.
They just do. Our balance drops every day and it hurts.
In yesterday’s post, I talked about the pullbacks as the price of admission for the historical long-term gains that the S&P 500 has provided over the last 100 years.
That may satisfy our brains but our hearts still have a bit of indigestion. And we know that feelings drive our actions every bit as much as facts.
So buy yourself some nice dividend stocks or dividend paying funds and ETFs and know that every quarter, you’ll get a nice surprise. And even better, reinvest the dividend so that when the market is down, like it is now, you’ll reinvest at a discount. You’ll buy more shares than when the price was higher. How cool is that?