I was writing an article last week; another in the series of my income exploration that combines dividend growth ETFs with other traditional income products such as bonds, REITs, Utilities, MLPs and more.
The writing of the article then became a cathartic, emotionally draining and humbling experience. Step by step, the article unfolded and began to open the door to a locked and very bad experience for me.
Here are the key paragraphs that worked like hypnosis, unlocking a past memory that for emotional purposes I had buried deep somewhere in the locked vault in my brain. In the article I am comparing the revenue stream from my ETF portfolio to the public portfolio of notable book author and SA writer David Van Knapp. Here's how that read...
David's launch date of June of 2008 is both fortunate and challenging. It was already apparent that the banking crisis was severe, and that financials were very risky investments. In March 2008, the Federal Reserve Bank of New York provided an emergency loan to try to avert a sudden collapse of the company. However, the company could not be saved and was sold to JPMorgan Chase for $10 per share. Much more bad news was to follow in quick order.
Leading up to the financial crisis, U.S. banks had been dividend stalwarts and would have been staples in many dividend based portfolios. Here's a look at Wells Fargo's (WFC) long-term dividend history according to dividata.com
That looks pretty enticing to me. To each his own, but if I was a dividend or dividend growth investor through the 90's and early 2000's I think WFC might have been in my portfolio. What's also interesting is that WFC made it through the tech-inspired stock market correction of 2000 without any damage. In fact, they increased their dividend through that crisis. Not a surprise in retrospect, 2000 was a tech meltdown, 2008 and beyond was or is a financial crisis. Did we fix that crisis, or are we still in that crisis, or creating a new type of debt fuelled financial crisis? Only time will tell.
And here's Bank of America's (BAC) dividend history.
Mr. Van Knapp had lots of warning signs already flashing before June of 2008, but certainly he deserves a lot of credit for not stepping on the financial landmines. That helped him in the short term to say the least. That said, as the above Wells Fargo chart shows, perhaps a very patient investor with a very long time horizon would still be rewarded with growing income in the accumulation stage. Over a 15 or 20 year time horizon, 2008 to 2009 might look like a blip.
All said, David had to navigate through troubled waters and he did so with great patience and judgment. In June of 2008 (the public portfolio launch date) the stock markets had just begun their correction. The markets had fallen by over 12%, but the real fall was to come. Markets of course corrected by almost 60% from top to bottom from 2008 through 2009.
OK, and from that article, here's the key phrase that made me freeze and turn ghostly white.
I don't know if I would have seen the warning signs early enough to get out of the Wells Fargo's and Bank of America's of the world.
And then it hit me. I WAS invested in Bank of America heading into the financial crisis. Not only that I stuck my chest out and bought more when BAC went "on sale". Not an easy bit of investigation, but I went on my TD Waterhouse page to find the statements and confirm. I went back and replayed that bad movie. And it was as if I was watching that movie for the first time, even though I was that movie's main (tragic) character.
Did I lose money? Yup. I remember averaging down and bragging to my buds about buying low and patience and all that puffed out chest stuff. I held BAC moving into the crisis. I bought more at 21.32. I then sold in early January of 2009 in the area of $6. The worst experience and decision of my investment career. OK, to be honest I've done worse. And I can tell you, that was painful to go back and look at those TD Waterhouse statements. Ouch! Talk about buying high and selling low.
And you'd think I would have known better, I was actually working on a U.S. bank at the time - ING Direct U.S. I was in contact with two of the smartest banking and branding guys on the planet, Arkadi Khulmann and Bruce Philp. Those are "the guys" that actually built the worldwide ING Direct model (launched first in Canada). Arkadi was the Harley riding, incredibly charismatic and brainy CEO. He knew things were really bad heading into the crisis. He knew many years before things went public. He even went to Washington to jump up and down and pound on the desks of government leaders and agencies. No one listened in Washington. I didn't listen from our offices in Wilmington, Delaware and Toronto, Ontario.
There were many land mines moving through the Great Recession. In fact, 37% of all Dividend Champions (the best of breed for Dividend Growth Investors) froze, cut or eliminated their dividends.
David had shared his own experience with (GE). Of course that's a well diversified company with many divisions. Unfortunately one of their divisions was also a financial arm, GE Capital. That division was enough to seriously challenge the management and balance sheet of GE. GE had a long history of dividends and dividend growth. Once again, here's a chart from dividata.
By the time GE had reduced its dividend in June of 2009, the share price had fallen precipitously. Those who sold on the cut suffered the deepest loss of all, capital that goes Poof! Of course those who purchased the company 15 years before (or more) would still be "up".
And there's the rub. What really happened to the income stream and total portfolio values of those dividend growth investors who were invested before the recession? How did they react? How patient were they? What kind of hit did they take on the income front, and total return front? What did they do when they held companies within that group of 37% of dividend champions that froze, cut or eliminated their dividends?
As I found out there is a certain investor psychological phenomenon at work when you own a company; when you've already done your research and come to the conclusion that it's a great investment. You are committed to that company, and somewhat attached emotionally. And as psychologists will let you know, we humans like to think we're right. And we'll rationalize our way into believing we're right. And we'll hang on to that notion, and stock.
There may be recent evidence as well when investing to support that you are right. An investor who had accumulated BAC through the 2000's had been treated to some very nice capital gains and dividend growth. Some investors would have been patient and waited for the cut, some investors certainly would have been able to read the tea leaves (and balance sheets) and abandon the great ship Bank of America in time.
The point is times were tough for investors of all stripes. That said and IMHO there have been way too many articles on SA that pick 8 or 10 companies that made it through the recession with ease that go on to state that it was easy to avoid the pitfalls of the Great Recession because dividend growth investors would not have been invested in the financials or companies like GE, or the many others that ran into trouble.
I think those articles and comments are dangerous to experienced and novice investors alike. Readers would be wise to check up on the history of those authors and commenters to see if they were investing through the recession. If they were not, they have no idea of what companies they would have held and how they would have reacted to the price, dividend and emotional challenges of the day.
To me, that is the greatest unanswered question on Seeking Alpha. What happened to equity and dividend investors through the recession?
Inquiring minds want to know. As my favourite band Pink Floyd eerily chanted ...
Is there anybody out there?
Disclaimer: Dale’s commentary does not constitute investment advice. The opinions and information should only be factored into an investor's overall opinion forming process.