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Dividend stocks can’t protect you from a market meltdown

Stock prices are much lower than they were a few weeks ago, with every major index, both in the United States and overseas, down more than 10 per cent, which is the definition of a correction.

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Investors who thought owning dividend stocks would protect them from the worst of a falling market learned a hard lesson this month.

As the broad market plunged in August, dividend stocks were right in there among the casualties. In fact, dividend-based indexes have underperformed the broader market on a year-to-date basis. The S&P/TSX composite index lost 10.1 per cent for the year to Aug. 25, while the S&P Canadian Dividend Aristocrats Index lost 13.7 per cent, the S&P/TSX dividend composite index fell 12.5 per cent and the S&P/TSX composite high dividend index fell 17.9 per cent.

Some dividend payers held up remarkably well in the recent market upheaval. George Weston, Loblaw Cos., Metro Inc. and Telus Corp. were among the stocks that were either in the black for the year through Aug. 25 or very close to it. But this resilience was very much related to these stocks being in two conservative sectors – consumer staples and telecom.

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Problem is, these two sectors represent only a small chunk of the Canadian market. The two dominant TSX sectors are financials and energy, both of which are stuffed with dividend stocks that are having a hard time this year. Example: Four of the Big Six banks were down more than the S&P/TSX composite index for the year to Aug. 25 – Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce and National Bank of Canada. Dividend yields for all have risen to around 5 per cent, which is good news for income seeking investors with cash to deploy.

Energy has been a particular problem for dividend investing. On a year-to-date basis, all but one stock in the S&P/TSX capped energy index has fallen (the exception was Advantage Oil & Gas). Among the blue chip dividend payers in the group, Suncor Energy was down almost 9 per cent on the year, Canadian Natural Resources was down 28 per cent and Imperial Oil was off 15.3 per cent.

What dividends will do for you in a correction is offset your losses a little bit. If a stock falls 10 per cent but has a 3-per-cent dividend yield, your total return is a loss of 7 per cent. What dividends won't do is offer near-certain protection from the worst of a market correction. That's what bonds are for.

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