- Bear markets occur when major indexes drop at least 20% from recent highs.
- Dividend investors receive higher yields during bear markets.
- Long-term investors should view bear markets as opportunities.
Look for the bright side — and there is one.
2022 has been a tough year for the stock market. While some stocks have managed to thrive (such as Big Oil), all major indexes and many blue chip stocks have seen their stock prices drop by double-digit percentages this year.
Bear markets can be tough on portfolios, but they can have a silver lining. There’s opportunity in the chaos for all investors during bear markets, but it’s especially true for dividend investors.
It’s easier to ignore stock price volatility
The great thing about dividends is they reward investors for being patient. The investing saying “time in the market is better than timing the market” holds true for two reasons. First, it points to how trying to time the market is counterproductive. Also, it highlights the benefits of holding on to stocks — especially those that pay dividends.
As an example, let’s take a look at two blue chip stocks, JPMorganChase JPM
In the five years leading up to Oct. 1, 2022, JPMorganChase’s stock price was only up around 6%, yet during that span, the bank has paid out $17.64 per share in dividends.
Now, am I saying JPMorganChase is a better investment than Berkshire Hathaway? Not at all. But what I am pointing to is that during bear markets and down periods in the stock market, dividend investors can take peace in knowing they’ll get tangible rewards in the form of dividend payouts regardless of how stock prices are performing (especially if they’re investing in Dividend Aristocrats).
One thing you should use to your advantage — especially if you’ve been purchasing stocks during the latest bull run — is the chance to purchase more shares and potentially lower your cost basis. Your cost basis is the average price you’ve paid per share of stock. For example, if you bought 20 shares at $200 each, your cost basis would be $200. If you bought 20 more shares at $150, your cost basis would be $175.
Many stocks right now are the cheapest they’ve been in the past couple of years. By lowering your cost basis, you can (hopefully) lock in higher profits when you eventually sell shares down the road. And if you’ve been investing set dollar amounts, you’re now getting more bang for your buck.
Warren Buffett once said, “Be fearful when others are greedy, and greedy when others are fearful.” Bear markets are usually a sign investors are fearful, but instead of panicking and making the mistake of slowing down or stopping your investing, you should do the opposite. For long-term investors with time on their side, bear markets should be viewed as an opportunity to purchase great stocks at a discount.
Take advantage of higher dividend yields
When companies announce their dividend payouts, they do so in per-share dollar amounts, so a stock’s dividend yield is relative to its stock price. For example, if a company’s yearly dividend payout is $2 per share and its stock price is $100, its dividend yield would be 2%. If its stock price dropped to $50, its dividend yield would now be 4%.
Generally, you want to be suspicious of too-good-to-be-true dividend yields because you have to wonder whythe yield is so high. In this example, investors should wonder why the stock price dropped by half. During bear markets — when the stock market as a whole is experiencing drops and nothing is fundamentally changing with many great businesses — these high dividend yields can be a blessing. Again: more bang for your buck.
Focus on being consistent
One of the best things you can do as an investor is remain consistent. This can be hard to do while stock prices are falling, but it’s in your best interest if you have the means. You may think you can wait until stock prices hit bottom before buying, but that’s attempting to time the market, which you should never do. Even if you’re “right” this time, it sets a bad precedent.
Focus on the bigger picture and use this time to your advantage.
Photo by Morgan Housel on Unsplash