- The Federal Reserve just cut rates but reduced the outlook for future rate cuts.
- This sent the market tumbling lower.
- However, I believe this is a huge gift to dividend investors.
- I share how I am taking advantage of this gift.
The Federal Reserve just cut interest rates by another 25 basis points, which was widely expected by the market. However, despite rate cuts typically being a tailwind for equity and bond valuations, today’s equity and long-term bond markets plunged. The Dow Jones (DIA
The reason for this sharp move in the markets was the change in the Federal Reserve’s dot plot, which indicated fewer rate cuts and a slower pace of those cuts moving forward than previously expected. This should not have been too surprising, as I warned recently:
While the market is currently pricing in…nearly a 75% chance that the Fed will cut by 75 basis points or more over the next year, this is far from guaranteed…as the economy has been quite strong. The election of Donald Trump and the implementation of his pro-growth policies may…make it harder for the Fed to justify further rate cuts. On top of that, inflation remains persistently above the Fed’s target level…All of this indicates that the Fed may not have as much room to cut rates as the market is currently pricing in. As a result, there is a real risk that the Fed will significantly undershoot the rate cuts that the market is currently pricing in, and this could weigh heavily on the market’s performance in 2025.
Additionally, Jerome Powell emphasized that the Federal Reserve will need to see clear progress on inflation in the data before continuing to cut rates. Combined with stronger-than-expected U.S. economic data in recent months, this guidance caused the dollar to appreciate, which in turn weighed on gold (GLD
The Fed’s Early Christmas Present To Dividend Investors
First and foremost, the market was in need of a pullback. Recent data shows that retail investors have never been so confident in the stock market’s outlook over the next 12 months.
Moreover, exuberance surrounding the future impact of artificial intelligence has reached new heights, epitomized by the breathtaking rally in Palantir (PLTR
Numerous market valuation models also indicate that the market is significantly overvalued.
However, as a long-term, income-focused, value investor, I have not been cheering these results, even though my own portfolio has more than kept pace with the broader market over the past several years. This is because I subscribe to Warren Buffett’s investing philosophy at Berkshire Hathaway (BRK.A
We’re a net buyer of stocks over time. Just like being a net buyer of food – I expect to buy food for the rest of my life, and I hope that food goes down in price tomorrow. Who wouldn’t rather buy at a lower price than a higher price? People are really strange on that. They should want the stock market to go down – they should want to buy at a lower price.
This logic applies equally to dividend investors like me: falling stock prices are good news if you are a net buyer of dividend stocks over time, as it allows you to lock in higher dividend yields on new purchases, thereby growing your passive income stream faster than you would have been able to otherwise.
This is why I believe the Federal Reserve’s revised dot plot—and the subsequent sharp pullback in stocks—is a gift for dividend investors. Unlike traders who chase momentum stocks and attempt to time the market perfectly with an exit right at the top, as a dividend value investor, I am focused on underlying business fundamentals and stock valuations. As a result, my priority is the valuation multiple and dividend yield at which I am buying a stock. Therefore, I cheer pullbacks like the one we just saw.
How I Am Taking Advantage of It
Thanks to this pullback, some of my favorite blue-chip dividend stocks have seen large declines in their stock prices, with Blue Owl (OWL
Some of my favorite dividend-paying natural resource stocks have also been pulling back sharply. For example, Newmont (NEM
Investor Takeaway
No one knows for certain where the market will go from here. It could be a short blip on the radar screen before the market resumes its march higher to new heights, becoming even more detached from valuations. However, it could also mark the beginning of a correction or even a bear market as investors and traders are forced to come to grips with valuations once again.
Regardless of where the market is headed, my approach will not change. I will continue to focus on buying high-quality businesses that have durable and defensive business models, fortress-like balance sheets, high and sustainable dividend yields, and a long-term ability to grow those dividends at a rate that matches or beats inflation. I also emphasize buying stocks with greater-than-average odds of experiencing valuation multiple expansion over time. This sharp pullback only makes my job easier. Since I have no plans to liquidate my portfolio anytime soon, and I plan to buy significantly more stock and gold in the coming years, I am actually rooting for a correction or even a prolonged bear market as a deeper pullback would allow me to buy high-quality dividend stocks at even better valuations.
This pullback is especially exciting because it is not driven by concerns about the underlying health of the economy. Rather, it is being driven by concerns that the economy is actually performing too well. As someone who is far more focused on dividend sustainability and dividend growth than on valuation multiple expansion to drive the majority of my long-term total returns, this is my ideal setup for a market pullback since the slower pace of Federal Reserve rate cuts is unlikely to spark a wave of dividend cuts. Instead, it is effectively giving me a de facto dividend hike by pushing starting dividend yields higher as stock prices fall. This is the kind of setup that we pray for—and prey upon.