Surviving A Worst-Case Scenario To Become A Dividend Growth Investor

Mike Nadel profile picture
Mike Nadel
15.13K Followers

Summary

  • GE's price tanked during the Great Recession - and the company slashed its dividend, too.
  • By not panic-selling and by reinvesting dividends, GE investors survived those dark times.
  • GE was in the minority, as most Dividend Aristocrats did not cut dividends.
  • Dividend Growth Investing can provide peace of mind.

After buying 1,000 shares of General Electric (NYSE:GE) at $30.21 apiece in June 2008, I soon faced an income investor's worst-case scenario.

Just nine months later, GE's price was down 81%, bottoming out at $5.87. Then, three months after that, the company announced a 68% dividend cut from 31 cents to a lousy dime.

OK, maybe that wasn't the absolute worst of worst-case scenarios. After all, General Electric didn't go out of business or eliminate its dividend entirely. Those were small consolations at the time.

So why am I revisiting this nightmare more than six years later?

Well, I promise I am not a glutton for punishment. I simply was reminded of my GE experience as I read fellow Seeking Alpha contributor Eli Inkrot's recent article titled, It's Hard To Make A Case For Pessimism.

Eli used unassailable logic (as well as impressive math) to show how difficult it would be for a long-term, buy-and-hold investor to lose money on any of the Dow Jones Industrial Index's 30 components.

Each Dow company pays a dividend, and the index includes many decades-long income growers. Some do have relatively brief histories of dividend hikes, however, and a handful either froze or slashed payouts during the 2007-09 recession.

Which brings us back to GE, which was a Dividend Aristocrat until, well, it wasn't.

Attack Of The Straw Man

Many who dismiss Dividend Growth Investing as a strategy like to use GE as "proof" that DGI is flawed.

Sorry, but that argument is a straw man. The vast majority of Aristocrats did not cut dividends, and most had significantly lower peak-to-trough drawdowns than the S&P 500 did. Those invested in Aristocrats got through the recession just fine, despite the negative influence of General Electric and a few others of that ilk.

Although I had no discernible investing strategy back then, my GE experience helped set the stage for the DGI guy I would become.

As the market tanked, I wasn't smart enough to bail out of GE at $28 or $26 or $24, before the damage got too severe. I also wasn't brave enough to reach into my wallet to buy 1,000 more shares at $6 or $9 or $12.

I was scared enough to hold on for dear life, however. I also was stubborn enough to reinvest dividends and steadfast enough to avoid panic-selling at or near the bottom.

More than six years after I bought my stake, GE is still trading for 13% less than my purchase price. But a funny thing happened to my GE position: Because I kept reinvesting dividends, usually at bargain prices, I now have 1,248 shares worth nearly $33,000.

So even though GE cratered during the worst economic crisis since the Great Depression... and even though it cut its dividend by more than two-thirds... and even though its per-share dollar value remains considerably lower than my purchase price, my General Electric position is worth 8.5% more than I paid for it.

Hold, Drip, Repeat

Certainly, an 8.5% gain over six years is nothing to crow about. Heck, it doesn't even match inflation. My GE experience nonetheless underscores the point Eli made in his article.

I all but tried to throw money down the drain, but the combination of my buy-and-hold determination and my dividend-reinvesting addiction simply wouldn't let my GE position come out negatively over the long term.

Back in June 2008, I also bought 3M (MMM), Procter & Gamble (PG) and DuPont (DD). As was the case with GE, I held and dripped through the recession and beyond. Unlike GE, those companies didn't cut their dividends, and those positions recovered much faster.

Six years ago, my "strategy" was to act upon stock tips from buddies and financial magazines. So I like to believe I'm a tad better investor now that I conduct due diligence and actually think before making decisions. Quite a radical concept, huh?

I officially committed to DGI at the start of 2012. I realized my personality was more suited to long-term investing than day-trading. I liked the idea of owning "boring," name-brand, dividend-growing companies. And I believed that building a reliable, increasing income stream was a common-sense path to a lifetime of financial freedom.

Over the last year or so, I really have emphasized quality in putting together a diversified portfolio of 40 companies. GE is still something of an outlier, but I remain invested because it has become leaner and more focused on its core industries - and it's growing its dividend again.

Conclusion: D-G-Ahhhh!

Even if one or two companies "pull a GE" on me during the next recession, I am very confident my overall portfolio income stream will grow and my retirement will be secure.

And that, my friends, is why I revisited my GE nightmare. It's a reminder that I survived a (nearly) worst-case scenario and am now thriving. No wonder I'm sleeping so darn well.

This article was written by

Mike Nadel profile picture
15.13K Followers
"Do you know the only thing that gives me pleasure? It's to see my dividends coming in." - John D. RockefellerWell, a FEW other things give me pleasure, but I get where he was coming from.+++I manage two real-money portfolios at DividendsAndIncome.com:++ Income Builder Portfolio: https://dividendsandincome.com/income-builder-portfolio/++ Growth & Income Portfolio: https://dividendsandincome.com/mike-nadels-grand-twins-college-fund/
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Disclosure: The author is long GE, PG, MMM. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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