In a Crazy Stock Market, Dividends Aren’t Your Friend

A second performance gauge is “standard deviation,” a measure of how much the daily price of an investment tends to vary from its average price over a year. A bigger number means the price has wider swings up and down, which is risky for any investor who might be forced to sell during a downturn.

Over the period studied, the standard deviation for all U.S. stocks was 17.3%, compared to 15.3% for dividend stocks and 3.6% for bonds. In other words, dividend stocks behave like other stocks, presenting much more risk than bonds.

While Davis does not discuss interest-bearing accounts like bank savings, his point is relevant to these as well. Annual returns on a one-year certificate of deposit are terrible – just 0.335% according to the BankingMyWay.com survey. On the other hand, CDs and other federally insured bank savings have a standard deviation of zero, meaning they are risk free.

In other words, if you put $100 into a one-year CD, you’d be certain to get $100 back in 12 months. Put $100 into dividend-paying stocks, and you would get only $84.70 a year later if those stocks suffered an average downturn. That loss would more than wipe out the $3.70 you’d earn in dividends.

The stocks could instead go up, and history suggests that in the long run those stocks would be more profitable in the average year than interest-bearing accounts, but there could be a lot of sleepless nights along the way. Also, any dividends taken as cash and spent would reduce those stocks’ long-term returns, as those return figures assume all dividends are not spent but reinvested in the same basket of stocks.

Bottom line: Any money switched into dividend-oriented stocks or mutual funds should come from other stocks, not from the fixed-income portion of one’s portfolio -- unless you really intend to take more risk.