Well, that happened.
The Dow dropped by 725 points on Monday, its worst drop since October of last year. And while it made back a lot of those losses Tuesday, it was a stark reminder that stocks can be wildly volatile.
The Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite have all trended lower for the past week as investors wring their hands over falling bond yields and rising case counts of the COVID delta variant.
This little bout of volatility may just be the pause that refreshes, a needed consolidation to create a healthier and more durable bull market. Or, it could very well be the opening shots of a new bear market that takes a major bite out of stocks. It’s too early to say just yet.
But shocks like these remind us why dividend investing matters.
3 Big Benefits for Dividends During a Rocky Market
1. The payment of a dividend allows you to realize a return even when the market isn’t cooperating. When you depend on the dividends for income, you’re never in that nasty position of having to sell a good stock at a bad price in order to meet your current living expenses.
2. Dividend payments are also a good enforcer of discipline. Companies that need to keep cash on hand for dividends are less likely to blow it on a money-losing acquisition or some other common act of corporate stupidity. Dividend paying breeds a better kind of company.
3. Dividend-paying stocks tend to be less volatile overall. There are varying reasons for this, including the fact that dividend payers tend to be older, more established companies. But a major contributing factor is that the dividend acts as an anchor of sorts. As a stock falls in price, its dividend yield rises, all else equal. And a higher yield attracts new buyers, which helps to buoy the price.
A Low-Volatility Dividend Play: Public Storage (NYSE: PSA)
Let’s focus on that low volatility aspect. Volatility is one of the six factors we track in our Green Zone Ratings system, but it works a little differently than most of our others. A high score here means low volatility. We want to avoid highly volatile stocks that can blow up our portfolios. We seek to win by not losing.
Take leading self-storage landlord Public Storage (NYSE: PSA). It isn’t the highest yielder at 2.6%, but this REIT is a reliable dividend payer that has raised or maintained its dividend every year since 1991. Public Storage rates a 65 overall, making it a “Bullish” stock in our system. But the details are far more interesting.
Volatility — Public Storage rates a 99 out of 100 on volatility. This means that the stock is less volatile and offers better risk-adjusted returns than almost every other stock in our universe. If you’re concerned about a wave of market volatility coming, a stock like Public Storage makes sense. It’s a company that owns storage sheds, for crying out loud. If there was ever a business model that was recession-proof, this would be it.
Quality — Public Storage also rates well on quality at 83. Public Storage rates consistently well on its returns on assets, investment and equity and enjoys strong margins. It’s a REIT, so it carries a lot of debt, which dings its score here a little. But overall, this is an excellent company and one that can survive the apocalypse.
Momentum — Public Storage carries a strong momentum score as well, with a factor rating of 80. The business model may be stodgy and boring. But the stock has proven to be anything but.
Growth — PSA’s growth rating of 62 isn’t “tech stock” growth, of course, but it’s still an excellent rating considering the line of work this company is in. It rents storage units. That’s it. It just happens to be really good at it.
Value — Public Storage isn’t cheap. It rates a 12 on this factor. Most REITs score low here due to the quirks of REIT accounting. But even taking that into consideration, Public Storage is an expensive stock. Investors are comfortable paying for quality.
Size — It’s also not small. This is one of the largest REITs in the world by market cap, and it rates a 10 based on size.
Bottom line: Again, we don’t know what comes next in this market. This week’s volatility might have been a flash in the pan, or it might be the start of something worse. Either way, if you’re looking for a low-volatility option to ride out whatever comes next, Public Storage is an option.
To safe profits,
Editor, Green Zone Fortunes
Charles Sizemore is the editor of Green Zone Fortunes and specializes in income and retirement topics. Charles is a regular on The Bull & The Bear podcast. He is also a frequent guest on CNBC, Bloomberg and Fox Business.