The recession is coming, it’s time to freak out! OK, I’m kidding of course. Is the recession coming? Honestly, I have no idea, but the market sure has turned from ugly to downright dreadful in the last few weeks. A few weeks ago we saw the biggest 15% points drop in the history. Then on March 9 we saw the third biggest single day drop since the Second World War.
Once you combine the recent market meltdown and the uncertainties over COVID-19, a lot of people are freaking out. Some people are hoarding toilet paper by the boatload at Costco, some people are selling all their stocks and putting cash under their mattress, some people are fighting over the incredible (not) GIC rates at below 2%, and some people are pawning their gold teeth for money.
It sure is hard to stay positive when apocalyptic news is popping up everywhere, your neighbours are hiding in their panic room in the basement while praying their hearts out, and you are making more money than your investment portfolio from dog sitting for your freaked-out-sky-is-falling neighbours.
Back in mid-Feb, before the free fall happened, our dividend portfolio value was at its all-time high. A month later, we have seen a loss of over $200,000. Some of our holdings are now in the negatives, including stocks that we bought a number of years ago.
Am I freaking out? No, not really. I still fall asleep within minutes of my head touching the pillow and I still sleep through the night. I am not waking up in the middle of the night with cold sweat and worrying about all the loss we have taken. I am not waking up in the middle of the night screaming bloody murder because we are experiencing a significant loss in the portfolio value.
Believe me, all is not lost. I am optimistic that things will calm down and the market will turn around eventually.
Since we are still in the accumulating phase of our financial independence journey, a downturn is actually a welcomed event. Why? Because a downturn will allow us to purchase stocks at a discount while still racking in juicy dividends. For example, Royal Bank was trading around $108 back in February and yielding around 4%. At time of writing, Royal Bank is trading around $90 and yielding around 4.83%. If I were to deploy $10,000 to purchase Royal Bank, I would be getting 19 more shares at $90 per share compared to $108 per share. Furthermore, instead of receiving around $400 in dividends each year from Royal Bank, I would be getting almost $83 more in dividends per year. Now let’s not forget that Royal Bank has been paying dividends since the late 1800s and the company has never cut or suspended any dividends…
When I first started investing in individual stocks, I purchased stocks called ING (now it’s called Intact Financial, IFC.TO) and Manulife (MFC.TO). I purchased both stocks well before the financial crisis. When the financial crisis hit, ING’s stock price went from the mid $50s down to the low $30s, or a drop of over 40%. Shortly after I purchased Manulife, the company cut the dividends, causing the stock price to drop from around $30 all the way down to around $9. Back then, I thought about selling both stocks and cutting the loss. Fortunately, I was investing with money that I didn’t need in the short term. Rather than selling these stocks and taking a significant loss, I decided to hold onto them both and collect dividends instead. A few years after the financial crisis, the stock price started to recover and I started to see positive returns on these two holdings. Even after the latest market meltdown, I am still seeing positive returns for these two holdings.
One of the advantages of holding dividend-paying stocks is that you have time on your side. If the stock price is lower than your book price, you can wait for the price to recover and collect dividends in the meantime. If you are fortunate to hold enough shares so you can DRIP additional share(s) whenever there’s a dividend payment, that’d allow you to slowly average down your cost basis. Similarly, if you hold an index ETF that pays distributions, you can just sit back and wait. Of course, you can afford to wait as long as the dividend-paying stock or index ETF doesn’t cut its dividends or distributions. This can be considered as a psychological benefit. The same isn’t true when you own a non-dividend-paying stock such as Amazon, Google, or Facebook. You won’t be getting paid any dividends, therefore, it could be harder to resist the temptation of selling the stock when the stock price is in a downward spiral.
Perhaps the problem for some investors is that they started investing due to the fear of missing out. They heard about the long bull market and saw many of their friends making money with their investments. The fear of missing out meant these investors may have started investing without having the right psyche. Rather than asking themselves the three important questions before investing, they jumped in the market not fully prepared. Perhaps they invested with short term money that they needed, perhaps they falsely identified their risk tolerance (i.e. growth rather than conservative), perhaps they didn’t understand what they were buying, or perhaps they were borrowing money to invest. When Mr. Market temper tantrums and the future looks bleak, these people freak out, start to lose sleep, and decide to sell low. Unfortunately, they become the textbook example of buying high, selling low.
Remember, the stock market is like a roller coaster. It has its ups and its downs. Please do not freak out about the recent meltdown. Please do remember that the stock market has a historical long return of 8%. Invest for the long term and ignore the noise.
Rather than stocking up on toilet paper and other apocalypse necessities, we will continue to stock up on dividend-paying and index ETFs periodically and take advantage of the suppressed pricing.
Dear readers, what are you doing during this volatile time?
36 thoughts on “Recession is coming, time to freak out”
Once again great post Bob. It has been a rough ride since February when the news of COVID 19 came out that made it worst with the oil price wars between Russia and Saudi Arabia.
My portfolio like many others took a big hit. But as a long term dividend investor I have not sold any of my positions. With that in mind, I am already maxed out – as I don’t try “to timed” the market. I continue to invest whether the market is bullish and great news that we are now bearish.
I totally agree that this should be a good accumulation phase (don’t know where the bottom is) and trying to add as much as I can. This time I started new positions on sectors such as consumer defensive (SAP.TO), cyclical (AW.UN.TO and PZA.TO), telecommunications (SJR.B.TO), and industrials (SIS.TO).
Solid picks. I would be a bit with AW.UN and PZA.TO though.
Apologies everyone for using the term “locked in” and the confusion it caused. My bad but it did provide a teachable moment. I’ve held a major Canadian Bank for over 20 years and understand Yield on cost. In all that time the dividend was frozen for a couple years but never cut. I try to think in possibilities and probabilities. It is possible for any company that pays a dividend to eliminate it, raise it, freeze it, split it, reduce it etc… the probability of dividend changes occurring may be lower with some companies than others. When talking about investing and finances, it’s probably best not to use absolute terms like locked in.
thank you Gruff403 for your response – I did not mean to single you out but rather the example, sorry 🙂 – “Keep your stick on the ice” – Red Green
LOL on the dog sitting line. I’ve made more than $60,000 dog sitting over the last 5 years, but there’s zero dog sitting business now. Usually people get dog sitters when they travel. No travel, no need for a dog sitter. It’s about as viable as a cruise ship business now.
Things will get back to normal some time. Fortunately, dog sitting is just one of my gigs.
Haha it wasn’t targeted toward you. :p
I have no idea the dog sitting business can be that lucrative.
Nice post! I also almost sold MFC during the financial crisis but decided to hold them after all. Now looking to increase my FTS. Stay safe and well!
It’s important to diversify. Bank stocks drop tremendously during a recession and oil stocks are cyclical. Defensive stocks like consumer staple, utilities, telecoms, railway drop less.
If one’s portfolio is across several sectors, then the drop in portfolio value will be less.
Great post. I’m not too worried too but seeing the sea of red in the portfolio is a bit difficult to look at. I have been buying more as well, but I anticipate that the banks might hold or dare I say it, even cut their dividend. There’s going to be a lot of people not working and not able to pay their mortgages. We will see what happens.
Even if they do cut their dividend, getting BMO at 7% (right now) is still awesome! I’m sure they won’t cut it that drastically anyway. Canadian banks are seemingly invincible, the government won’t let them fail if they can help it.
Thanks GYM. We’ll have to wait and see what happens to these dividends. 🙂
thanks for the clarification .. i suspected it was that … yes the dividend can change i understand
phrases like … “locked in yield” are a little misleading , nonetheless
anyway . i am glad i kept a good amount of cash for the end of the bull
i have been dipping in these past weeks .. and will keep at it . even after the bottom appears ..
such amazing deals now investors …. the once in a lifetime scenario .. my years of experience have paid off .
Bought BNS and T but jumped in instead of averaging down. Now down substantially but not worried as I locked in at 5%+ dividend yield. T just did a two for one stock split so I’m happy about that. This is an amazing opportunity to get some fantastic companies. If you cannot stomach these market roller coasters you shouldn’t be in the market. Like Steveark, I’ve lived through a few of these as well. Stay healthy.
may go down more . but we all invest for the long term .. i have been buying in bits .. as its impossible to know when the bottom comes
the locked in phrase …. ??
what i really want to know is what this means .. . if you bought at 5% div and the company then drops it to 4% .. do you keep the 5% ??
is that what locked in means ??
Hi Ram Mar,
Let me give you an example to explain what “locked in” means…
Say you purchased TD at $50 with a dividend yield of 5%, meaning each TD share would give you $2.50 in dividends each year.
If TD price drops to $40 but keeps paying out its dividends, you’re “locked in” with the 5% yield. You keep getting $2.50 per share each year regardless of what the share price is.
However, if TD decides to cut its dividends to say $1.25, then you’re no longer locked in with your 5% yield. You’d be getting a 2.5% yield on cost (and whatever % yield at the current share price).
Hope that helps.
Bob, using YOC (yield on cost) is a bit of a hairy metric.
If TD drops to $40 then your yield is really 6.25% (not 5%) and conversely if TD goes to $60 your yield is really 4.16% not 5%.
Using YOC on some of the BCE that I’ve owned for decades would give a yield north of 200% (wouldn’t that be nice!) but in reality I still only get ~5% based on the current value of BCE
Current yield is a much better metric because it reflects more accurately the state of the company.
Dividends are never “locked in”.
Yes, I agree. I used cost on yield in my example to simplify the math and for the simplicity.
What I was trying to explain is that dividends are only safe or locked in if companies continue to pay dividends. 🙂
Ram Mar – dividends are not “locked in” – read that as “no guarantees” – a company declares dividends not as percentages but as an amount of money to be paid to shareholders on a specific date – note the company is under NO obligation to declare a dividend of a specific value nor to declare one at all.
simple example – you buy XYZ stock at $10 on March 19 and the board of XYZ declares a dividend of 50 cents top be paid March 31 to shareholder of record (ie. they own the stock) on March 20 – so what happens is on March 31 each shareholder gets 50 cents for each share. If XYZ is still at $10 the yield is 5% (I’m assuming one dividend per year) if the stock has increased in value to $15 the yield is 3.3% if the stock falls to $5 the yield is 10% – the yield is a function of both the value of the stock (at any given point) and the dividend paid.
What Gruff403 (above) “locked in” was a dividend stream from BNS and T but that dividend stream is subject to being changed or even eliminated – yes ‘stable and good’ companies will endeavour to keeping paying dividends but they are under absolutely NO obligation to do so. See SIR Royalty which cut its dividend to zero because they have no cash flow – the restaurants are closed.
If you are looking for absolutely guaranteed cash flows buy a GIC or a bond (NOT a bond ETF) but don’t expect a large amount of yield.
well . how quickly that all changed . fantastic . ..
I dollar cost averaged during the scary drops . boy it was hard but i knew it was right
and now i have been rewarded . amazing increases in such a short time .. ( sure it can go down more . . got more cash left over )
but i have been waiting years for this .. and to finally get out of 60/40
and now 100 % equites. feels good .. way more than enough dividends etc to live on
of course if i want to i can rebalance back into FI anytime …
1. Continue investing as planned, while still preserving extra cash.
2. Make sure we stay isolated for our health and to protect everyone around us by eliminating 3 unnecessary contact people.
3. Help people who are being hit much harder by the shift in the economy. A recession is much more than just a loss in the markets, real livelihoods are being impacted in ways that may never recover. And of course the *reason* for the market tanking is much worse than just a financial problem. Many people are not going to survive this unscathed.
4. Freak out quietly because a pandemic at this stage, with a totally inept US federal government, IS still terrifying.
dividend question … . .
dividends are raised and cut by companies ..
so do you receive the dividend at the point you bought at indefinitely ??
i.e a locked dividend
Sorry to burst your bubble Ram Mar but the short answer is no – for example SIR Royalty just cancelled all distributions ie. zero payout. Some companies particularly those that fall in the dividend aristocrats label may (big MAY) continue paying dividends but this being unprecedented in nature, truly it is, all bets are off.
Personally I hope the dividends will keep flowing but the economic mayhem we are entering into throws any past experience into question.
i keep reading phrases like … That dividend yield, up at an astounding 8.5%, is also one to lock down.
and this …. They can do this by locking in some tasty yields from the biggest blue-chip TSX dividend stocks
and . . ..
Investors who buy today can lock in an exceptional dividend yield and buy the shares well undervalued before the stock inevitably returns to pre-crash levels.
all from Motley fool ..
always saying locked dividend …. . which is why i wanted to know if the dividend i buy it is what i get long term ??
That’s all assuming the company doesn’t cut or suspend dividend payments. 🙂
That’s a very mature view for someone who, by my old guy standards, is very young. I’ve lived through a few of these and while each one is different due to different causation events and with different consequences life goes on and in time the market reaches new highs. And you are right, this is a great thing for accumulators. I’m glad to see such good advice being spread in a time where there is a lot of uncertainty and fear. This one doesn’t scare me much because I lived through the last three. This is the first one for many, and a great learning experience, stay healthy.
Thank you Steveark. The market will remain volatile over the next little while IMO. Good time to accumulate IMO. 🙂
I sold my Toronto home two months ago and downsized to a condo, with considerable money to invest, band although no one can predict the bottom I am waiting for the VIX to be under 40 for at least a week before putting new money to work.
Thanks for bringing a sense of calm to the economic storm. In the short-term, it’ll continue to be rough waters… but in the long-term, we’ll be in a much better place. With any crisis comes opportunity (for the mentally and in turn, financially prepared).
Just continue to invest. Dollar cost average, things will work out in the long run.
Bob, I understand and agree with your objective in this post but please copy edit before pushing the “post” button.
“A few weeks ago we saw the biggest 15% drop in the history.” ? what does that mean? a biggest 15% drop ? in what? value? points? – sorry to be picky but numbers and their qualifiers do matter.
also see https://www.snopes.com/fact-check/largest-stock-drops-trump/
– and no I do not support Trump but rather the exact opposite.
This is not make light of the current situation but there are enough inaccuracies being generated.
Good point, the post was written about two weeks ago. Will add that I meant points.
I have been retired just over 3 years. I read Your Retirement Income Blueprint by Darryl Diamond and followed the advice to keep several years’ of expenses in a high interest savings account so that when the markets drop, you don’t have to sell your investments. It sounded good at the time. It sounds really, really good right now. I am not panicing at all because I know that I have my expenses covered for the next 3 years. Also, I will benefit when I receive my tax refund because the prices will probably still be down by then and I will buy shares in dividend paying blue chip companies. If prices rise, I will still buy. That book changed my investment strategy at a time it needed to change as I was now withdrawing from my portfolio instead of adding to it. I can’t recommend that book enough.
Thanks for your emails. I still learn something from them and love the case histories.
It’s always nice to have some cash in reserve, especially when you’re retired. I will have to put Your Retirement Income Blueprint on my to-read list. 🙂
I can second Jan’s recommendation of Daryl Diamond’s book.
I’m seeing this as a buying opportunity! Already increased my position with BNS.TO and TD.TO and looking to start one with RY.TO and FTS.TO, just debating when (I know I know, market timing is a no-no), but I don’t really mind waiting and ironically I just read this https://awealthofcommonsense.com/2020/03/what-if-you-buy-stocks-too-early-during-a-market-crash/ last night, which I think was a read and held a lot of truth to it (and I read his book).
Nice, we are slowly adding things too. That’s a great article to point out that nobody can really time the bottom.
meant to say, “I think was a GREAT read…” 🙂