Finding Dividend Paying Stocks During Market Volatility by Chad Shoop, The Sovereign Investor
Since 2009, the U.S. has experienced what seems to be a never-ending, raging bull market. In nearly six years, the S&P 500 Index has soared 154%.
Despite the occasional setback, the S&P 500 continues to make new highs. In short, buying on any of the previous dips would have boosted your overall portfolio every time.
But, we are entering volatile times.
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That means sharper, more frequent swings in the market. Down 5% one day, up 3% the next … this will be the new normal. It will be enough to spook anyone from jumping back in.
However, if you are willing to test the waters, there is only one particular type of stock to pay attention to…
In the coming volatile times, it will be more challenging to pick the winners and losers. They will change from one week to the next based on the latest news that has the financial pundits and media a buzz. But that doesn’t mean you can’t add some stability to your portfolio.
To do that, you want to focus on strong, dividend paying stocks when the market dips.
This strategy will not only give you capital appreciation when those stocks rebound thanks to the low-rate environment we will be in for several years, but, perhaps more importantly, you are locking in a higher yield by buying these stocks on the dips.
Let me explain.
Lock in a Higher Yield With Dividend Paying Stocks
When the market becomes volatile, it is not the time to join the panic. As the saying goes: “Cooler heads prevail.” Instead, it’s better to use this as a time to grab great dividend-paying companies on the cheap.
As stocks fall, you’re not only able to grab great bargain stocks, but you can also lock in a higher yield.
It’s important to remember that you’re not settling for any old company that occasionally tosses out a pittance of a dividend to shareholders. The trick, however, is to spot companies that have a long history of increasing or maintaining their current dividend payments through tough economic spots. For example, a company that managed to maintain or raise its dividend through the Great Recession (2008 to 2009) is a good indication of strength.
If a company was able to pay out a dividend during the Great Recession then it most likely can do it again through present day global turmoil.
It’s a testament to their overall financial operations as well as their commitment to returning capital to shareholders in troubling times.
That’s why it’s important to find these companies on days when the market insists on acting like a skittish colt. This allows you to take a temporary situation and not only participate in a stock market rebound, but also lock in a significantly higher yield than the company had just a few months ago.
Past Performance is Key
As I said, the trick to finding the right companies to add on the dips is in its history of returning cash to shareholders. Let’s look at a perfect example:
Shares of AFLAC (NYSE: AFL), the supplemental insurance company with the talking duck commercials, have fallen 8.5% since July of last year, and dipped more than 6% since the start of 2015.
But, as share prices fall, dividend yields rise.
And if you were waiting for a time to buy AFLAC, now is perfect.
Its current yield, roughly 2.7%, is sitting 17% higher than it was in July and 8% higher than it was just a few weeks ago.
You can compare that modest 2.7% yield AFLAC currently pays to what your greenback fetches elsewhere — 0.24% in a one-year U.S. Treasury, 1.15% in a one-year bank CD and an average yield less than 2% for the S&P 500.
That makes placing your money with one of the industry’s leading insurance giants an easy way to lock in gains that are significantly better than what else you can get for your greenback.
And it passes my history test. Take a look at what AFLAC has returned to shareholders since 1990:
Clearly AFLAC is committed to increasing our wealth, even in difficult times such as 2008 and 2009. And while share buybacks may not act as an instant return like a dividend check, it reduces the amount of shares outstanding, which boosts the bottom line of the company.
On top of these wealth increasing effects the company has maintained, we are also in for capital appreciation. AFLAC has grown earnings by more than 8% on average for the last three years, while its stock is trading at just 9 .5 times earnings, a ridiculously cheap valuation.
AFLAC’s historical earnings multiple is running at an average of 16 times earnings.
If investors simply gravitate towards this historical average, we are looking at a 70% increase from current prices.
The shares recently fell more than 12% in just a few months, only to recover nearly all of those lost gains in the following couple of months. Today the stock has fallen down some and is trading at $58. But I believe we are about to see shares bounce again, and I don’t think they will stop until they hit a price north of $70.
So don’t just buy the dip.
Make sure you use the dip to lock in significant yield for your portfolio.
Editor, Pure Income