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THREE YEARS AGO this month, in the middle of the pandemic-driven market meltdown, I went on a dividend-stock buying spree.
I had just turned 60 and was looking to step away from the corporate world in 18 months’ time to take up a second-act career as an author. As part of my retirement plan, I had a sizable money-market account that I planned to live on for a few years before I started taking Social Security and pulling from my retirement accounts.
The money-market account wasn’t paying much—about a half-percentage point—but I knew the cash was secure, which was important as I stepped away from a steady paycheck. Then COVID-19 hit. Stocks nosedived and government bond yields plummeted as investors rushed for safety.
Everywhere I looked, I saw quality, blue-chip stocks trading at huge discounts. Many of these stocks were dividend aristocrats with a long, unbroken record of steadily increasing their dividends. Exxon, for instance, was trading in the mid-$30 range. The stock of pharma giant AbbVie was trading in the upper $60 range. Coca-Cola was trading under $40.
Some of these dividend stocks were yielding close to 6% at these distressed prices. Being a bit of a contrarian by nature, I began to question why I was holding cash in a money-market account where I was earning next to nothing when I could be getting a 5% or 6% yield, with upside potential when the stock market came back.
It was risky, yes. Some of these companies could cut their dividends or stop paying them altogether. There were rumors that Exxon, for example, would be cutting its dividend for the first time in nearly 40 years, which was why its stock was trading at such a discount.
Still, the risk-reward calculus of buying quality dividend stocks at beaten-down prices just seemed too favorable not to take advantage of. I was still working, after all. If the dividend stocks didn’t end up coming back, I could always work another year or two to rebuild my cash account.
After doing my research, I took a big chunk of my cash and bought positions in individual dividend stocks that were being recommended by the experts: Exxon, AbbVie, Coca-Cola, AT&T, PPL, Dow Chemical, Blackstone, Public Storage, Archer-Daniels-Midland, 3M and a few others.
Three years on, Exxon’s stock has tripled. Abbvie, Dow and Blackstone have doubled. Coca-Cola and Public Storage are up some 50%. None of the stocks I bought stopped its dividend, and a few, such as Exxon and Abbvie, have continued to raise their payouts.
Unfortunately, a few of my high-yielding stock purchases haven’t done so well. AT&T, for instance, has lost nearly half its value, while 3M has also been a dog.
Overall, however, my gamble has paid off. My account value has increased while I’ve also collected three years of dividends. I was able to step away from my corporate job on schedule in September 2021.
Now, with the stock market up more than 50% from its March 2020 lows and interest rates much higher, I’m reversing course. I am selling most of my dividend stocks and putting the money into high-yielding money-market accounts and certificates of deposit. For instance, I was recently able to secure an 11-month certificate of deposit (CD) at Capital One paying 5%.
I now own only three dividend stocks: Exxon, AbbVie and AT&T. I’m keeping the first two because the companies are well-managed and continue to increase their dividends. I’m keeping AT&T because the new management team there seems to be turning things around. Still, I may sell those three remaining positions in the weeks to come to further lower my risk and raise cash.
I realize that I’m selling into a weak stock market right now. But at the same time, it’s a market that’s offering the highest money market and CD rates in more than two decades. If I’m able to get a 4% or 5% risk-free yield on my cash, I’m happy with it, even if I’m not keeping up with inflation.
Would I do anything differently if I could do it all over again? Yes, instead of buying a basket of individual dividend-paying stocks, I would buy a dividend index mutual fund or exchange-traded fund like iShares Core High Dividend ETF (symbol: HDV) or ProShares S&P 500 Dividend Aristocrats ETF (NOBL). By going with an index fund, I would have better diversified my portfolio against the losses of any one single stock, such as AT&T.
Lesson learned. Still, I’m happy I took the opportunity three years ago to buy into a down market. By taking a little risk, I have a bigger cash cushion to help me ride out the market during these early years of retirement.
James Kerr led global communications, public relations and social media for a number of Fortune 500 technology firms before leaving the corporate world to pursue his passion for writing and storytelling. His debut book, “The Long Walk Home: How I Lost My Job as a Corporate Remora Fish and Rediscovered My Life’s Purpose,” was published in 2022 by Blydyn Square Books. Jim blogs at PeaceableMan.com. Follow him on Twitter @JamesBKerr and check out his previous articles.
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Money for the future and growth should be in the stock market. Money that is needed for current income and would be hurt in a market downturn shouldn’t be in dividend stocks or any stocks. Interest rates are good now but stock market is up a lot since the pandemic response screw up bottom. If possible income producing investments should be in tax friendly accounts like an IRA or a Roth.
Jim, I also like dividend paying stock ETFs (SCHD, VYM, VIG). In percentage terms what do investing a “size-able” and “big chunk” of money mean?
I buy “brokered CDs” from Schwab and it’s very easy to get the best rates/terms with my CD ladder.
bought 5yr cd paying 5.45% a few days ago
lots of depositors switching to the big banks
Wow. I got a 1 yr CD paying 5% at Capital One.
Money market funds in core accounts at brokerages like Vanguard and Fidelity are paying 4.7-4.8% with no 1 year commitment
Hmm, I just saw Capital One 1yr CD at 4.15%.
Do you mean switching from the big banks? Big banks are paying next to nothing while the credit unions and online banks are paying very high rates for CDs and checking/savings accounts.
The issue right now is that businesses fear that the federal government wouldn’t protect their deposits above $250k if a regional bank failed, but they’d be protected at a major bank, hence the switching since the Silicon Valley Bank failure.
Oh I see. That doesn’t make sense to me since the deposits of SVB were ultimately ensured by the government.
Thankfully, I don’t need to worry about the >$250K problem at a single bank. (I wish I did.)
Jonathan: since you are knowledgeable about all this. Are investments protected in any way like bank accounts? Presumably most people (at least on HD) have much higher amounts in investments. Not against losses, of course, but institutional failures? Of course, then again, the bank protections were instituted as a means to help against bank runs, so that might not be a concern with investments backed by stocks or bonds.
Check out this article:
https://humbledollar.com/2019/08/when-brokers-fail/
Thanks!
Nice moves. If you had dry powder and a steel spine, March 2020 was a great time for bargain hunting.
I guess I had both as a year earlier I inherited some money but said to my wife that the market, quoting Allan Greenspan, was too frothy at that time. I invested a portion in a total market index fund every 5% drop and invested the final amount within days of the bottom, then converted the same percentage into bonds every 5% recovery as market came back. Could have made more of a killing if I tried to time the top and bottom of the market, but know that you can’t predict. Unfortunately a good portion of those gains lost last year in the bond swoon. Easy come easy go I guess!
Well done. I did some yield chasing from 2018-2020 ‘cos the rest of the market was wildly overvalued. (I am a value investor). The cigar butts gave me a nice dividend flow. In 2020, when the market became more reasonable, I rotated into quality (in tax-deferred accounts). Now my portfolio yields about 2.2 % with lower volatility than SPY.
Dividends are one of the few available tax dodges for retirees. When I fill out the worksheet, I see my Federal tax would have been $18,500, but because of qualified dividends I’m paying $13,000 instead. You can’t do that with CDs.
Well done!
Would NOBL or HDV have tripled or doubled over the same time frame? Would either have paid a 6% dividend?
I don’t know much about Capital One, but appears the 5% 11-month CD you got was a promotional rate which expired on 3/14/23. Their 12-month is going for 4.15% right now so snagging the 5% was a good call.
In general, I think the bank runs scared many banks and they reacted swiftly to raise their rates across the board to attract and retain deposits. At Ally, I noticed an 11-month “no penalty CD” was being offered for 4.75% so I put some money into that a few weeks ago. When I look today, the rate has been lowered to 4.35%.
Our emergency savings is a mix between 4-week treasuries, I bonds, high-yield savings, and no penalty CD’s. If I was retired and had a larger “safe” amount of money I needed to park somewhere, I imagine I’d also be doing a bit of laddering with conventional CDs and going a little longer on some of the treasuries.
Yes, it was a promotional rate. My on-top-of-things son told me about it, and I’m glad he did!
Lots of banks and credit unions still paying 5% or more: just have to shop around.
https://www.investopedia.com/best-cd-rates-4770214
(Scroll past the ads at the top to where they give the best rates by time-length like 6-months, 12-months, 18-months, etc.)
In the interest of sharing info, Marcus sent me an email a couple of days ago about a 10 month promo CD paying 5.05%.
I have to check that out, Edmund
Any stock investing other than the S&P 500 or Total Stock is a fool’s game. Mr Bogle’s first index fund averaged 11.9% from l975-2015.
Indexing cannot or ever be refuted. End of story on stock investing! ONE FUND
I would add a 2nd fund. A total international index fund. I have about 20% of equity allocation there.
Kenneth Tobin, I’m with you and Mr. Bogle. I’m stunned your comment sits at -18.
One could argue that you are too narrow minded for excluding the rest of the world and should go for a whole-world index. Any argument against that is an argument against your S&P or US-market strategy.
For the majority of 401k or IRA investors I tend to agree, but in addition, building an income stream with dividends will help in retirement.
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Kenneth Tobin, I like your style!