/biz/ - Business & Finance

Yet another objection I hear is “Dividends are not guaranteed”. Well, this is investing, what did you expect? If you want guarantees, go invest in treasuries! Of course, dividends are not guaranteed, and no sensible person would ever make that claim.
However, during times of crisis, companies never cut their dividends nearly as much as the price of their stocks falls. During the Great Depression, for example, stock prices fell by 89.2% at their deepest drawdown. My god, that makes the Great Financial Crash (GFC) look like child’s play. If there was ever a time for companies to slash their dividends down to the bone and avoid wasting money, this was it.

Instead, what did we see? During the Great Depression, dividend yields touched almost 14%! Incredible. Here’s a historical graph of the dividend yield of the S&P:
What does this mean? It means that while companies will cut their dividends when times are hard, they will not do so in proportion to the drop in their stock price. And this makes sense because dividends are not linked to the stock price. That is the whole point! Dividends are based on fundamentals, and just because the market panics, doesn’t mean that the fundamentals have deteriorated to the same extent, if at all.

Note how it was only during the dot-com bubble crash when the S&P was comprised of mainly overvalued, non-dividend paying tech stocks, that yields didn’t spike. If you need a further reminder to avoid tech stocks, this is it.