Dividend investing when stocks crash is about seeing opportunity.
If you follow the financial markets at all, you know that for the last weeks the market has been in turmoil. Stocks have crashed with the S&P 500 recording a decline of more than 7.5% in one day. It is never nice to see the value of your investments decline. However, by focusing on investing for dividends when stocks crash, it helps to stay disciplined.
That is because dividend yields are inversely tied to stocks prices. If the stock prices go down, the initial dividend yield on the investment goes up. You are getting more dividend income on your investment when stock prices drop. When stocks crash, dividend investing becomes even more attractive.
Stay disciplined
As I emphasise it on almost every post, I hope You have taken the time to create your investment plan.
If not, follow this link to create your investment plan.
During times like these, it is especially important to follow your investing plan. If you invest monthly into investments that fit your criteria, nothing changes for you, apart from being able to put money to work at better prices.
If you liked a business at $100 per share, you should love it at $80.
The worst thing you can do, is change your behaviour out of fear.
Know your risk tolerance. When creating an investment plan during a bull market, you might say that you can handle risk easily. Because you haven’t felt the angst of seeing the value of your investments drop. If the current stock market drop is tough to handle for you, maybe this is the shock that you need to realise your true risk tolerance. Stocks have been historically a fantastic way to grow wealth. But if stock price movements cause you high stress, maybe it is not the best investment for you?
Put the crash into perspective
Stock prices do not accurately represent the value of the underlying businesses at all times.
Investor sentiment has completely changed as represented by CNN’s Fear&Greed Index.
Stock market gives you a price for your businesses every day. The current prices reflect, what investors are currently willing to pay for a slice of the underlying business. You should not make a decision based on the price alone. It doesn’t always accurately reflect business performance. Always judge a stock by the performance of the business in which it represents an ownership stake in. If the company is growing the amount of cash it generates and distributes to shareholders, it is of no importance how the stock price moves.
It can be hard to see the long-term perspective with so much noise surrounding the financial markets. It helps to take a broader view of things and consider what a great wealth-creating opportunity the stock market has historically been throughout all sorts of turmoil.
As Warren Buffett has said :
“In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
Going on the offensive
If you are a regular investor, with a long-term investing horizon – market crash is good news for you.
You can buy quality income-producing businesses at a discount price.
Let’s say a company was paying a $3 dividend per share and trading at $100 per share. That is a nice 3% yield.
If the share price declines to $75 per share, and the investing thesis is intact, you are getting a 4% yield on the same investment.
That is 25% more passive income in your pocket if you invest now.
Dividend investments made at lower prices, means more passive income for the income investor.
Also with US stock market valuations at very high levels, the market drop has bought valuations down a bit.
That means finding fairly valued dividend stocks becomes easier.
I am looking at my watchlist and a lot more stocks have fallen into the “buy range” for me. As I invest around 40% of my salary each month, it is great to see that there are many great companies trading at attractive valuations now.
I am looking to increase or initiate ownership stakes in quality companies that pay their shareholders in cash.
Summary
My investing goal is simple – I want dividend income to cover all my expenses by 2026. The latest stock market drop means that I can buy quality dividend companies that help me achieve this goal – at a better valuation. The value of my investment portfolio has dropped. But most importantly- I am getting more passive income on my monthly investments than I would have before. This is all that matters as I move towards my personal investing goal.
Stick to your investing plan in all market conditions!
Disclaimer: This is NOT a recommendation to buy or sell any shares. You can lose a part of or all your invested capital. I am not responsible for the accuracy of any of the figures presented in the article. I am not a financial professional of any kind and any stock transactions or analysis published should NOT be considered to be investing recommendations. Before making any investing or financial decisions, you should contact an appropriate professional. This website should be viewed for entertainment purposes only.
