The two most difficult decisions to make when investing are: what stock should I buy and when is the right time to buy it? If you are an income investor, or are so disgruntled with the current market mayhem but want a reliable 7% dividend yield, read on.
Investing for dividends and playing for capital gains are two completely different strategies. When investing for big and sustainable dividends, we care very little about momentum, small price swings, and chart patterns. And we often buy while others are selling such as during a panic drop. This is why...
Consider Strong Dividend Stocks in Panic Markets for Giant Yields
Take a stock that has increased its earnings over the past 7 years. This gives us a measure of confidence toward sustainable growth. Second, look for a company that has increased its dividend over the past 7 years. This speaks well of their dividend policy. With these two simple filters you have a fair to good chance of a sustainable dividend. Now you simply wait for a market crash to compress prices in order to get your 7% yield.
Take Sunco Logistics Partner (NYSE:SXL) as an example. Strong earnings and increasing dividends year after year have been the hallmark of this company.
- In 2007 the dividend was $3.48 with share prices in the low $50s. This gave a hefty yield of 6.4%. While this is good, it can get much better during a crash.
- During the 2008 crash, prices dipped down to $43. There is no way to know that would be a bottom and it would be virtually impossible to know. However, take the income investor with a target of 8% yields. The dividend was $3.79 which means as soon as prices fall below $47.375, you would be locking in for an 8% dividend.
- Since then share prices have almost doubled, but you are not interested in selling since the forward dividend of $4.76 gives you more than 10% per year in income payouts based on your entry point.
As long as the company holds the policy of increasing dividends, and has the ability to do so based on increasing earnings, you care very little as an income investor whether the price goes up or down in the short term. Your 8% yield should only increase over time.
- The point? Time your entry for strong dividend stocks to get the long term yield you desire. This usually only happens during irrational market crashes.
Some Blue Chip Dividend Stocks to Keep on Your 'Market Crash' Radar
What will be the entry point for stocks with increasing earnings and dividends over the past 7 years in order to achieve an ongoing 7% yield?
- Sunoco Logistics Partners would need to fall to $69.43
- AGL Resources (AGL) would need to fall to $25.71
- Atmos Energy Corporation(NYSE:ATO) would need to fall to $19.43
Granted, share prices would have to fall quite a way to hit those levels right now, but if the market heads significantly lower as the news sources buzz about another potential recession, look for jumping yields in these stocks. You will need to be patient and wait for the right opportunity.
To be fair, we may need to loosen standards slightly to allow more companies to pass our filter, companies that had decreasing earnings during the market crash of 2008. To gain a 7% yield, the following stocks will need to pull back to these levels:
- Alliance Resource Partners (NASDAQ:ARLP) needs to pull back to $52.71
- AstraZeneca (NYSE:AZN) would need to pull back to $39.66 based on the trailing 2 dividends
- Enterprise Products Partners (NYSE:EPD) would need a small pull back to $34.57
- Magellan Midstream Partners (NYSE:MMP) would need a pull back to $44.86
Tracking the S&P 500 Dividend Aristocrat List
While many look to the potential for a major market crash with trepidation, you should be looking at it as an opportunity. Make a short list of companies with solid earnings and a large history of increasing dividends year after year.
A good place to start is the S&P 500 Dividend Aristocrat list as these large blue chip companies have raised dividends annually over the past 25 years. Keep a close watch on those companies with dividends in the higher range such as:
|Consolidated Edison Inc||ED||4.40%|
|Leggett & Platt||LEG||5.80%|
|Pitney Bowes Inc||PBI||8.10%|
To give yourself fair warning, be a bit skeptical when yields are overly high in moderate markets (some on the above list may fit that criteria). We want strong companies to deliver big yields because of a panic sell-off in all stocks; we are not as excited to buy large yields in tepid markets because the company is carrying high risk.
The Secret to a Big Dividend Wrap-Up
One last word of optimism albeit with a warning: As long as a company keeps raising dividends year after year, you need not be overly worried about market corrections. If you get an entry point that allows a 7% yield, you can sit back and relax provided your company maintains earnings and sticks to its policy of increasing dividends annually. When the market springs back, your yield (based on your entry price) could soar into the double digits within a few years time, as did SXL.
On the downside, if you haphazardly select a stock based solely on increasing dividends without looking at the sustainability of company earnings and their cash position, you may get a nasty downward surprise if dividends are suspended and share prices are low. But as long as you perform a measure of due diligence, you can be like Warren Buffett who eagerly anticipates the next market correction as a gift that gives him a great entry point. If you know what price you need for the desired yield, then you have learned the secret of high dividend yields during a market crash.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.