Going out with both guns blazing / Why I love dividends
Do I think that stocks have hit a bottom and will do nothing but go up from now on? No. I think that it is entirely possible that we are experiencing a relief rally now that the credit markets have started to show slight signs of thawing and that stocks will start to swoon again once people realize that we are in for a tough recession and the resulting earnings, or lack there of in many cases, begin to come out.
Having said this, I have been steadily purchasing shares of companies that have tremendous dividend yields (that I believe are fairly safe) over the past two months...with the exception of after the two huge up days that we had. Why am I buying if I'm not sure if this is a bottom? Because no one knows for certain when we will reach one. I can guarantee you this though, many stocks are crazy cheap right now. They are pricing in Armageddon and while I believe that we are in a recession, possibly even a bad one, I have said before and I will say again...this is not the Great Depression. Even if it is, I'm going to go out with both guns blazing.
I'm not going to sit here cowering in fear like a whus and not purchase anything after a 50% drop. No I'm not dipping into margin to buy stocks, just ask many CEOs how dangerous that is, but I am putting every available penny that I can safely spare into the market and I will continue to do so over the next year. I can virtually guarantee you that people who buy stocks today will be better off than those who sell stocks today 5 years from now.
Flash back to the worst time for the markets in my lifetime, 1974 (I was very young, but I was alive then). Now that must have been a scary time for investors. It was the worst bear market since World War II. By October of that year, the S&P 500 had fallen 48% from its high two years earlier (sound familiar). Investors who purchased stocks at the end of that year were richly rewarded. By the end of 1984, that investor would have reaped a total return, including dividends, of 298%. By the end of 1994, that investor's total return would have been 1423%.
Is the economy going to be in rough shape for the next year? You bet it will. However, stocks will begin to turn around several months before the recession is over. Has my buying spree started six months early, a year early? Perhaps? Do I care? No. I will continue to save money by spending less than I make (novel concept I know) and I will continue to buy stocks over the next year. This too shall pass and when it does, you will be glad that you didn't just run away. I know it is tough to do this after seeing such massive losses in your portfolio, but selling and cowering in fear guarantees those losses investing more money will eventually eliminate them.
So why am I focusing on stocks that pay safe (that's why you look at things like payout ratios) crazy dividends ?
Long-term multiple contraction, which is a distinct possibility, does not impact dividends.
I don't know for certain if we will ever, not for a long time anyhow, see stocks trading at the earnings multiples that we have seen over the past several years. If the markets do experience a prolonged period of margin contraction caused by lingering fear, Baby Boomers slowly draining their retirement accounts, reduced leverage n the part of investment banks and hedge funds, or whatever for the most part dividends will be unaffected. As long as companies continue to earn, their dividends will be safe, but their stock prices will never climb to the levels that many people assume they will using recent history as a guide.
Four ways to buy and hold