Invest Like It’s 1999

A second great switch from Big Tech to Dividends is nigh.

Dividend stocks haven’t lagged big market averages this much since the previous century.

So far in 2023, iShares Select Dividend ETF (NYSE: ETF) is down almost -5 percent, even including dividends. The Dow Jones Utility Average is lower by slightly more. The S&P Telecommunications Services Index is down more than -10 percent.

The S&P Real Estate Investment Trust Index is the best performing income stock index so far. But even it’s underwater not including dividends.

In contrast, despite selling off a bit on Friday, the Nasdaq 100 is higher by 40 percent for the year. And the S&P 500—thanks largely to those same Big Technology stocks in the Nasdaq—is still ahead by more than 17 percent.

The lesson of 1999 was today’s pain can and will become tomorrow’s gain—and vice versa. And it’s looking more and more like history is about to repeat itself, with dividend stocks becoming the leaders and Big Tech the laggards.

Here are the facts. In 1999, the S&P 500 was up 21 percent, while the DJUA slipped almost -10 percent. But in 2000, utilities had their best performance ever: A total return of more than 50 percent. Meanwhile, the S&P 500 lost -10 percent. And the technology stock Nasdaq 100, which had doubled in 1999? It lost nearly -37 percent in 2000. And that was only stage one of a three-year, -75 percent wipeout.

The Nasdaq 100 didn’t fully recover to reach a new all-time high for more than 15 years. That’s despite the fact the information technology has been the premier growth industry for the past two decades, and stocks like Microsoft Corp (NSDQ: MSFT) and Apple Inc (NSDQ: AAPL) are now household names.

What happened? In their zeal to chase stocks with rising momentum, investors forgot that the stock market over any meaningful length of time is a weighing machine—with companies’ worth as businesses the most important metric.

When Big Tech became detached from measures of standard valuation in the late 1990s, stocks were essentially at the mercy of all too fickle investor sentiment. And when the bubble burst, there were no gauges of value to catch stock prices on the downside.

Sound familiar? It should. Stocks of big technology companies at this point are just as detached from business value as they were in 1999. And now as then few investors are paying attention.

At the same time, dividend stocks are easily as out of favor now as they were then. In the late 1990s, one of the popular strategies making the rounds was for those needing regular income to sell their dividend stocks to buy “growth” mutual funds populated by Big Tech market leaders.

The idea was to simply cash out the inevitable gains from growth stocks whenever one needed cash. It worked for a while. Then the market turned and those following the strategy were forced to sell at ever-shrinking prices, effectively eating their seed corn.

Some might say things are different this time—that technologies like artificial intelligence are just too explosive for there to be a relapse in stocks like Nvidia Corp (NSDQ: NVDA).

I certainly wouldn’t argue that AI isn’t for real, or that the applications don’t have a very long runway for growth. But it’s hard to argue IT hasn’t as well. And sometimes stocks simply price in too much, far too fast.

Also consider that as now, the Federal Reserve of 1999 was pushing up interest rates to squeeze out inflation—just after stomping on the gas to prevent the US from falling into a building global financial crisis that had just forced Russia into bankruptcy. Now it’s to quell inflation triggered in part by pandemic fighting stimulus.

Under then Chairman Alan Greenspan, the Fed did engineer a relatively soft landing for the economy, barely registering as a recession. That’s more or less what most people including the Fed expect to accomplish this time around. But they couldn’t save the market leaders in 2000-02, which had simply flown too high.

Maybe their actions will have a different effect on stocks this time. But 2000 was the best year in history to own best in class dividend stocks. And investors who made the switch from tech to utilities in 1999 multiplied their gains from the 1990s. Those who stuck with tech saw their dreams of a prosperous retirement vanish into thin air.

Still not convinced? In baseball, there’s an old saying “Hit ‘em where they ain’t.” In investing, that means you’ll always do best buying what no one else wants. At a bottom, everyone likely to sell has done so, which is why prices are so low. And it’s undeniable that high quality dividend stocks with no risk to their payouts are unloved, and therefore as cheap as they’ve been since the pandemic and were in 1999.

Conversely, at a market top, the leaders have likely attracted all the buying power that’s available. They’re priced for perfection. So anything that happens to cause doubt they’ll achieve it has the potential to create unstoppable selling momentum.

The most important caveat to all this is the Fed may fail to avoid a hard landing for the economy. And with so many investors and companies—even the Fed—now leaning in the other direction, the damage could be nothing less than catastrophic, both to the economy and stock market.

That means anyone invested in stocks—including battered, high quality dividend payers—needs to keep a sharp eye on what they own. And new purchases are best made in increments rather than all at once.

Even in 2000, not every dividend stock generated strong returns. Some succumbed to higher interest rates, revenue weakness or other unique challenges. And don’t count on ETFs to bail you out: They by their nature own the basket, so you’ll get the bad and ugly as well as the good.

Take the time to choose your own stocks wisely. It’s the best investment you’re likely to make this year.