Amidst the threat of a small nuclear war with our friends in North Korea, a former Playboy bunny threatening a tell-all against the POTUS, a Facebook security debacle, and, oh yeah, an emerging global trade war, the stock markets have become a bit uppity. A little divey. Some real lurching movement. Most of us are feeling a bit woozy because of it.

Keep calm and think long term

We investors tend to stay calm and stay invested as we think long term — just as we were taught. Steady, as long as the markets ascend. When stocks obey gravity and plunge, that long-term idea seems like a fad as we sell like crazy, hoping to salvage a few crumbs before the real Armageddon begins. Once the fear settles, we wait a bit for the trend to clear. Then we buy in a frenzy, hoping not to miss out on the rising action. But by the time the trend is clear, most of the gains have already happened. Crap. We missed out. That’s why the average equity fund investor earns just 4% over 30 years while the average S&P equity fund earns 10% over the same period. How can that be? It’s the investor sabotaging himself. Overthinking that boring buy and hold idea.

If my investment statement calls, I’m out

While the logic is there, and the math confirms it, it still hurts to look at the statements. All that money. Gone. What if your investments drop by more than your entire contributions for the year? No way that feels good. All that scrimping and saving, and it’s just not there. Maybe you should have splurged on the quartz counter-top…

Long-term means long-term

It becomes easier to think long term if your investments actually are long term. If you’re saving for a house as well as education or some other worthy goal that is just 1-5 years out, investing in stocks is risky. Over the long term, stocks have always won. But that only works if you actually have the time to wait. In the short term, it is anyone’s guess. I’d say stay in GICs.

The Power of Dividend Stocks

Still, even with all of this long-term talk, how do you feel good about a stock market downturn? Dividend stocks offer a different view since they pay a return — usually quarterly. This money is excess capital that is returned to you, the shareholder. Some of these companies have paid these dividends, and increased them for 10, 20, or more years. Often at rates much higher than inflation!

We can think of these dividend stocks like golden egg producers that keep spitting out more golden eggs each year. Cool! When the stock markets plunge, they go on sale. Even better. The eggs hold their value and there are more of them every year. And the chickens that lay them go on sale. But wait, there’s more.

Through these companies directly or through your online broker, you can set up a Dividend Reinvestment Program, or DRIP. Sounds complicated. Rather than gathering the eggs each quarter, the DRIP lets you give them back in exchange for more chickens, which produce even more eggs. And then more chickens. And still more eggs. And so on. More and more eggs each year!

Staying calm in a rough market

So let’s translate this into more vegan and financial terms. Enough chickens. Selecting a group of stocks with a long history of paying rising dividends is a good place to start. Focus on companies with good balance sheets in relatively future-proofed industries. Set them up in a Dividend Reinvestment Program (DRIP) so that the rising stream of dividends continuously buys more stock. If the markets rise, feel good about the increased value of your investments. If the markets fall, feel even better about buying more of these great companies, on sale, automatically. Of course, no stock is bulletproof. That is why you need a portfolio of them, nicely diversified by geography and industry, never with more than 5% exposure to any one stock.

How to get started with dividend stocks

To get started, check out Lowell Miller’s classic, The Single Best Investment: Creating Wealth with Dividend Growth. In the book, he points out the power of dividend stocks and provides some guidelines for selecting good ones. John Heinzl of The Globe and Mail also has some good ideas in his Model Dividend Growth Portfolio. You can also implement the strategy with Dividends focused Exchange Traded Funds (ETFs) from companies like Vanguard and iShares. If you have a good advisor, work with them to develop a sound portfolio that aligns with your financial plan and risk profile.

In Canada, gains from the dividends also have tax advantages relative to other types of earned income. This makes them especially attractive to hold in a cash account. When you get to retirement, you may have enough income just from this rising stream of dividends alone!

As always, investors should do their own research prior to trading in securities and consult a financial professional if they lack the knowledge and experience to trade on their own.

Not enough money to invest?

Check out Cashflow Cookbook. It includes ideas to free up as much as $13,000 a month of expenses to use for debt pay down and investing in dividend stocks.

Are you a dividend investor? Anyone else loving the downturn? Tell me in the comments.

Photo Credit: Matt Bowden on Unsplash 

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