In these uncertain times, will dividend stocks be the first to recover?

Since stock markets can turn on a dime, long-term institutional investors may find some opportunities amid the current chaos.

It’s been a long time since genuine panic hit markets, says Greg Taylor, chief investment officer and portfolio manager at Purpose Investments. “Generally, markets hate uncertainty and, arguably, we’ve never had a more uncertain time than right now. That’s caused a lot of panic selling and a lack of buying. But to me, that’s not the time to be selling.”

One phenomenon pushing markets even lower than they might have dropped otherwise is that, for the first time, markets are hitting a crisis when most investors own index-linked exchange-traded funds.

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“There are so many people in passive market instruments in the past few years, it’s really easy to sell the entire market,” says Taylor. “And coming out the other side of this, it’s going to be a really good time for stock pickers. There are a lot of companies that have gone down with the market just because they’re part of a passive index ETF.”

While not every company is likely to make it through the unprecedented global turmoil caused by the coronavirus, those that will are trading at very attractive valuations, he says. In the past few weeks, true market capitulation reared its ugly head as investors sold practically anything they could get a bid on, even traditional safe havens like gold and other precious metals.

With central banks taking drastic action and governments introducing major stimulus measures, the bond market is another reason for cautious optimism, says Taylor. “The bond market was the first to signal the problem — the U.S. 10-year yield started the year around two per cent and it really sold off aggressively as the yields slipped down to 0.3 per cent and that was a big wake-up call that there’s something bigger happening. But the fact that it stabilized there and we’re back to around one per cent — I think that’s a huge positive. If it had gone negative or even lower, I think that would have been a massive negative. And that would be something that we haven’t really priced in yet.”

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However, with bond yields still so low, investors will be looking for other income streams, making dividend-paying stocks look especially attractive at their suddenly lower valuations, he adds, though he notes it will be difficult to evaluate the safety of current dividends since it’s impossible to tell exactly how poorly companies will fare for the next few quarters. “Fundamental analysis is going to be incredibly hard to do until we know how long this slowdown is going to last.”

The aggressive sell-off also makes gold more attractive as investors have a rare window with even safe-haven assets under selling pressure. “In this new environment of low rates and the stimulus, gold would be an area that I think should highlight as a place where investments should have some exposure, as a nice insurance policy,” says Taylor.

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