As I reflect back on 2008, I am caught by the overwhelming feeling that the year was actually a very good thing for dividend investors. It is easy to think that it was a terrible year for our kind! Both Bank of America and Citigroup – long standing dividend payers with wonderful dividend increases year after year – cut their dividend payments drastically. General Electric – the poster buy for dividend growth stocks – elected not to increase its dividend for the first time since the 1970’s. Pfizer too elected not to increase its dividend. These are very common stocks that are found in a number of dividend portfolio around the world, even mine.[ad#tdg-embedded]
For a time there, it felt like the end of the world was close at hand (maybe it still feels that way). However, personally 2008 was a very valuable learning experience for me and one that I believe will assist me in my future investing endeavors. Here is what I think it was an awesome year for dividend investors:
2008 Emphasized the Importance of Asset Allocation
I write a lot about asset allocation on this blog. I have become more and more convinced that asset allocation is the most important part of my dividend portfolio. In 2008, I was far too heavily weighted towards financial stocks (Bank of America, Citigroup, Royal Bank of Canada) and I paid for it. I am even more focused on ensuring my asset allocation is well diversified across non-correlated assets. This means that I am diversified across market sectors as well.
2008 Showed Investors their TRUE Risk Tolerance
I talked about this in an earlier post. I strongly believe that 2008 really showed investors their true colours when it came to their risk profile. I think a lot of investors, dividend investors included, were shocked at how risk adverse they really were and made stupid emotional decisions as a result of it. It is easy to take a risk assessment test and be overconfident in your ability to handle wild swings in the market, which will provide you with a more aggressive allocation than you can handle. Successful investing requires an investor to be able to manage their emotions to ensure they stick to their strategy.
2008 Focused Dividend Investors on the Strongest Stocks
The companies that made it out of 2008 alive are the strongest of the companies in my opinion. It really did separate the wheat from the chaff. The resulting impact was that dividend investors had a more targeted list of stronger dividend growth companies for potential investment. The crap is now gone and we are able to move forward. Think of it in Darwinism terms – only the strong survived and we should focus on those stronger plays in our portfolios. Investing 101 really – focus on the best and forget the rest.
I will be honest, I hope that 2009 is a better year from a returns perspective. However, at my wealth accumulation stage 2008 was a good year from a learning perspective. I know that for investors at later stages in their investment life cycles it was especially painful. However, I think the lessons are still the same.