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Summary

  • Stock investors have endured two major bear markets since the turn of the millennium.
  • Some investors worry that a third major downturn may be soon ahead.
  • A select group of stocks have demonstrated the ability to not only perform well but in some cases thrive during past bear markets.
  • But if a bear market enters a liquidation phase like we saw in late 2008 to early 2009, all bets are off.

Investors have endured two major bear markets since the turn of the millennium. During these past episodes from 2000 to 2002 and 2007 to 2009, many investors saw the value of their stock portfolios cut in half if not worse. And following a virtually uninterrupted rally following the end of the last bear market in March 2009, a growing number investors are wondering whether we may soon be entering a third major bear market in the coming years. For those investors concerned about such an outcome, history has shown that a select group of stocks have collectively demonstrated the ability to tame these past bear markets and helped protect the value of investor portfolios. Of course, whether they can pull off such a feat a third time around remains to be seen.

The Bear Tamers

An elite group of stocks stands out for their ability to increase dividends each year for at least the past 25 years. They are known as dividend champions, many of which can be found in the S&P 500 Dividend Aristocrats Index. And over time, many of these stocks have shown the ability to perform relatively well even during extended bear market periods such as those that we have experienced in recent years.

For the purposes of this analysis, we will be examining stocks that meet the following special criteria. Since we want to concentrate on how dividend champions have performed during past bear markets, we will focus on companies that were already dividend champions in early 2000 as the first recent bear market was getting underway. And placing an emphasis on continued quality during what has been a difficult economic and operating period during the new millennium, we will also focus only on those companies that meet the above criteria and also remain members of the S&P 500 Dividend Aristocrats Index today. This screening process leads us to a list of 29 stocks, most of which are notable for their high quality and consistency of operating performance over time.

The Bear Market From 2000 to 2002

The performance of this elite group of stocks was exemplary following the bursting of the tech bubble starting in 2000. While the stock market as measured by the S&P 500 Index (NYSEARCA:SPY) experienced a decline of -47.42% once the bear market got underway in earnest starting on September 1, 2000 through to the bottom on October 9, 2002, the average total return from this group of 29 dividend champions was an impressively positive +12.66%.

Perhaps what is just as notable is that strong stock returns across the group was broadly based with 28 out of the 29 names in the group outperforming the broader market including 20 that generated positive returns over this time period and 13 rising by double-digits, which are shown below:

Lowe's (NYSE:LOW): 67.41%

Archer Daniels Midland (NYSE:ADM): 46.41%

Genuine Parts (NYSE:GPC): 46.39%

Hormel Foods (NYSE:HRL): 46.24%

Procter & Gamble (NYSE:PG): 45.81%

VF Corporation (NYSE:VFC): 42.52%

WW Grainger (NYSE:GWW): 39.88%

Sysco Corporation (NYSE:SYY): 37.81%

Consolidated Edison (NYSE:ED): 37.32%

Johnson & Johnson (NYSE:JNJ): 25.07%

3M (NYSE:MMM): 23.25%

Stanley Black & Decker (NYSE:SWK): 16.85%

Target (NYSE:TGT): 15.74%

Even those stocks that performed not as well among the group provided reason for cheer along the way as the 2000 to 2002 bear market unfolded. For example, seven other companies on the list including CR Bard (NYSE:BCR), Illinois Tool Works (NYSE:ITW), Coca-Cola (NYSE:KO), PepsiCo (NYSE:PEP), Becton Dickinson (NYSE:BDX), Kimberly-Clark (NYSE:KMB) and Cincinnati Financial (NASDAQ:CINF) were all also up double-digits well into 2002 in many cases before giving up these gains at the very end of the bear market.

As a result, the 2000 to 2002 bear market was a time where quality and income really demonstrated its value relative to the broader market.

The Bear Market From 2007 to 2009

At first glance, the performance of this elite group of Dividend Aristocrats was far worse during the outbreak of the financial crisis from 2007 to 2009. From the market peak in October 9, 2007 through the bottom on March 9, 2009, stocks as measured by the S&P 500 Index declined by -54.77%. And while their returns were certainly better on a relative basis, the average return across this group of 29 champions was also down a sharp -38.71% with only one stock in positive territory over this time period in Wal-Mart (NYSE:WMT) that was up +7.26%.

But when reflecting back on the 2007 to 2009 bear market, it can be broken into two distinct periods. The first was the ongoing market correction that was taking place for nearly a year leading up to the collapse of Lehman Brothers on September 12 along with the issues that accompanied this event including American International Group (NYSE:AIG), Washington Mutual, Wachovia and Citigroup (NYSE:C) among many others. And it was during the liquidation phase that occurred not long after this catalyst event that sent many of these dividend champions plunging to the downside.

With this in mind, it is worthwhile to take a look at how these 29 quality dividend growers were holding up prior to that fateful weekend in September 2008. From October 9, 2007 to September 12, 2008, stocks as measured by the S&P 500 Index had declined by -17.41%. But similar to the 2000 to 2002 bear market, the average return from this elite group of Aristocrats was notably better. While they were still collectively down, the decline was just -3.98%. And while the upside movers during this period were not as broadly defined as what was seen during the previous bear market, 10 out of the 29 were still generating solid positive returns. These are listed below.

Wal-Mart: 40.29%

Leggett & Platt (NYSE:LEG): 24.61%

Colgate-Palmolive (NYSE:CL): 13.43%

Johnson & Johnson: 9.78%

CR Bard: 9.51%

Procter & Gamble: 5.75%

Hormel Foods: 4.15%

VF Corporation: 1.95%

Sysco Corporation: 1.89%

PepsiCo: 1.25%

As a result, prior to the collapse of Lehman Brothers, many stocks on this list were generating a similar performance to those that posted gains during the prior bear market. It was only after the liquidation phase of the bear market was triggered where major banks, financial institutions and hedge funds were forced to dump most anything in a desperate effort to raise cash that the rug was pulled out from under many of these quality dividend stocks.

Not All Aristocrats Are Alike

It should be noted that while many stocks among the group of 29 champions included in this analysis enjoyed periods of strong performance relative to the broader market during extended bear phases, a number of names also notably struggled during these episodes.

For example, while Nucor (NYSE:NUE) and PPG (NYSE:PPG) did manage to generate +5% returns over the course of the 2000 to 2002 bear market, they were down -42% and -60%, respectively during the financial crisis.

While Emerson Electric (NYSE:EMR) was flat through March 2002 during the first bear market, it ended down -34% by October 2002 and dropped by -52% during the financial crisis episode a few years later.

Automatic Data Processing (NASDAQ:ADP) was down -41% following the bursting of the tech bubble, and while it was only down -3% when Lehman failed in 2008, it went on to decline by -28% through March 2009.

While McGraw-Hill (NYSE:MHFI) was only down -7% during the bursting of the tech bubble, it dropped by a staggering -67% over the course of the financial crisis.

And Dover Corporation (NYSE:DOV) underperformed the S&P 500 during both previous bear markets in falling by more than -50% during the 2000 to 2002 downturn and by more than -55% during the 2007 to 2009 episode.

As a result, just because a stock is a dividend champion does not mean it will hold up relatively better during a bear market. Moreover, just because a stock held up well during a past bear market does not mean it will do so the next time around. For these reasons, conducting rigorous fundamental analysis on any stock under consideration for inclusion in a long-term investment strategy remains as important as ever.

Bottom Line & Caveats

History has shown that an emphasis on quality dividend growth can serve investors well during extended bear market periods when the broader market is moving sharply lower. While not all stocks have performed well in each instance, many have shown the ability to at minimum outperform the broader market with some even posting solid gains.

With this being said, if financial markets enter into another liquidation phase similar to what took place following the collapse of Lehman Brothers starting in September 2008, all bets are off, as virtually every stock in the market is likely to get pulled lower during such an episode. This final point raises a particular point of caution, for if another such liquidation event were to unfold again in the future, fiscal and monetary policy makers worldwide no longer have the resources to deploy to once again resuscitate the global economy and artificially reinflate asset prices the way they did starting in late 2008 and early 2009. As a result, it would likely be the case the next time around that any such losses, regardless of how great the stock holding, may last longer than what most investors have become accustomed in recent decades. While not necessarily the most likely outcome, it is a risk with sufficient probability that investors should at a minimum keep on watch just in case.

Since the start of the current cyclical bull market in 2009, we have had three near miss corrections that had shadings of becoming liquidation type events before policy makers intervened. In an upcoming article, I will focus on the performance of these quality dividend growers during these more recent shock episodes.

Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met.

Source: How To Tame A Bear Market Like A Champion

Additional disclosure: I am long stocks via the SPLV and XLU as well as selected individual names. I also hold a meaningful allocation to cash at the present time.