Blog: You, us, everyone

In the follow-up of the February 2022 market crisis, investors were, very understandably, seeking security and capital income from their investments. Less experienced and beaten-up investors decided to allocate more than $100 billion to equities and ETFs solely focusing on dividend return opportunities.

Given the central bank policy to be rolled out to combat inflation, these allocations were a no-go investment decision! This was a clear no-brainer as these trades, with a plus 95% probability, were to misfire. In the meantime, these so-called stock-to-safety trades wiped out an impressive $ 5 billion of investable assets.

The safety deal was a catch-22; The shelter provided was for an ex-post event, while the future was to be different. The market is fascinated by growth stories and the best stories were to be delivered by the magnificent 7.

For equity investors, this is the latest lesson on the danger of market timing, ex-post behavior, and putting safety and precaution in front and above all. With Central Banks starting with the most aggressive tightening cycle in 40 years, dividend stocks, because of their value bias, were saddled while interest rates went higher. Their valuations spiraled lower at an unprecedented speed.

Typically, dividend stocks can be found in segments of Old Tech (CRCL, CSCO, IBM, among others), Consumer Staples (3M, PM, MO), Utilities, and Health Care. The dividend investment strategy is a marketing tool mostly used by companies that are after the quick trade. Technically speaking, any payout a dividend stock provides to a shareholder is effectively offset by a mechanical decline in the price of the stock — the so-called ex-dividend effect — leaving returns mostly a function of stock picking. In addition to the mechanical function, this year has been a particularly rough one. Stocks are valued for their future cash flows and because interest rates went higher, the NPV went down even with higher sales. Furthermore, the capital attribution to fixed income made by investors seeking safety reduced the support level.

For investors, going after dividend stocks is applying a short-sighted perspective. Throughout 2022 and 2023, the price appreciation potential as at the worst level since you’re holding on to something that cannot grow. You’re not getting the value appreciation out of those stocks compared to other opportunities in the market. This is also called an opportunity cost. We agree while opportunity costs can't be predicted with total certainty, but looking at macroeconomic fundamentals and performing some mathematics - and you don’t need to be a rocket scientist - can lead to better decision-making.