In this episode, learn how to invest in a bear (or down) market.
Also covered in this episode:
- how to build a resilient dividend stock portfolio
- current market conditions
- a brief history of market crashes
- learn the basics
- why dividend income is more important that stock prices
- learn the dividend stock selection process
- how Coca-Cola could provide over $202K/year in dividends
- how Home Depot could provide over $259K/year in dividends
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In this episode, I'm going to show you how to invest in a down market or a bear market. Hi, my name is Kanwal Sarai and welcome to the Simply Investing Dividend Podcast. In this episode, you're going to learn how to build a resilient dividend stock portfolio in a bear market or a down market. The keyword here is resilient, and resilient means being able to withstand or recover quickly from difficult conditions. So if we take a look at the screen on the last three years, we've seen the stock market go up, go down, up, down again, then up and then down again, and you can see it on the graph here. The market does this up and down, up and down, and this is some people have called it an economic storm. Some people are saying that we're headed towards a market crash or a market recession. So then, how do you go about building a resilient dividend stock portfolio? So before we answer that question, let's take a look at currently what is going on in the stock market or in the economy in general. So currently, as of this recording, inflation is high and it keeps going up little by little, and, along with it, interest rates have been increasing steadily in the last 12 months. Finally, we are starting to see that consumer spending is starting to slow down. So what does that mean for stocks, for companies that are paying stocks and paying dividends, and overall, the sentiment and the confidence of investors and consumers is low. Now, the good thing is, I've seen all of this before, or different variations of this before, in the past, because I have been investing. I've been a dividend investor for over 22 years, and since that time I have gone through the tech bubble crash of 99 in 2000. In 2011, we had the 9-11, the market was actually shut down for a period of days, and so we had a market crash. Then, in 2003, there was another crash. Then we had a big one in 2008 and 2009,. The financial crisis, and then another crash in 2010. And then, most recently, in March of 2020, when COVID started up and was prevalent in the world. We had a market crash then as well. Now there are some common themes that keep coming up every time there is a market crash or a downturn in the economy. So here I'm going to share with you just a couple of things that I have seen and witnessed over the last 22 years. So the first one is that no one can accurately predict how long a market crash will last. Is it going to last three weeks, three months or three years? So nobody knows and nobody can tell you that accurately. Everybody is taking guesses as to what is going to happen with the market and even today, as of this recording, we don't know what the market's going to do next month or next year. Will it continue to go down or will it go up? So nobody knows. But what does happen is that the media and the internet always goes into a frenzy and they start predicting that the great recession is coming, especially in March of 2020. This happened when COVID hit and there was a lot of talk in the headlines. You could see that, hey, the market is going to crash, it's going to tank and we might be headed towards a big recession. So that's always going to be there. The key is for you to ignore the noise. There's going to be a lot of noise in the media, a lot of noise on the internet and online, and we see that today as well. And it's interestingly enough, we see that even when the market is going up and when the market is going down, so that noise is always going to be there. The media, the media organizations, are not there to educate you or help you become a successful investor. Their priority, first and foremost, is to their shareholders. They are corporations like every other corporation out there. Their number one goal is to create generate profit for the owners. So just keep that in mind whenever you see fancy big headlines that are trying to convince you where the market is going one way or another. Okay, let's move on. The other thing that's common is that sentiment is always going to be very low, and it was extremely low when the market crashed in 99 2000. It was extremely low in 2008 2009. And then extremely low in COVID head right. Then it's very hard for people and investors to get very optimistic, and then so they start believing that, okay, this time is different. Maybe this is the big crash, maybe this is going to be the next depression, right, so that the sentiment is going to be low, whether it's investors or consumers, and so it is very difficult and very challenging to invest any kind of money into any dividend stock when that is happening. Now, the good news is that every crash has been followed by a recovery. So then, how do you go about building a resilient dividend stock portfolio? So the key here is knowledge and that's why you're here, that's why you're listening to this podcast. We're watching it. The key is knowledge and education. If you understand that, the market is going to be cyclical, it's going to go up, it's going to go down. Every five to six to seven years it's going to go up, then it's going to come back down again. Stock prices are going to come down again and then prices go up. It's cyclical. So knowing that is important. And then knowing how to invest, when to invest and what to invest in is also important. So never go into investing without getting the education or the knowledge first. And that's the same as whether if you're going to invest in mutual funds, index funds or ETFs or individual stocks and that's what I do so any type of investing you should have a clear idea and understanding and get the knowledge first before you invest your hard earned money into anything. Okay, so let's begin. So in this episode, I'm going to cover three things with you. We're going to start with the basics what is a stock, a dividend and a dividend yield? Then I'm going to show you what's important when it comes to investing, and then we're going to look at the dividend stock selection process. So let's get started with the basics. So a stock or a share represents ownership in a company. So, whether you you know, you'll hear people say I have 100 shares in company ABC or I own stock in company ABC. It means the same thing. Whether you're going to call it a share or a stock, it means the exact same thing. So if we take a look at this example, this is a Canadian company, one of the biggest railway companies in Canada. You can see that this company's Canadian National Railway has a little over 682,000 share million sorry, 682 million shares outstanding. If you were to buy all of the shares, you would technically own the entire company. Now, if you bought five shares or 10 or 100, you are still considered part owner of the company and as part owner of the company, you're entitled to share in the benefits of this company and to share in the profits of this company. And that's what a dividend is. That's just another fancy name for the company sharing its profits with you, the shareholder. So in this example you can see here if a company is paying a dividend of $1 per share and you own 1000 shares, you will receive $1,000 every year for as long as you own the shares and as long as the company continues to pay the dividend of $1 per share, stock prices can go up and down. It doesn't matter. Once you've bought the shares at a certain price, you own the number of shares and the dividends are paid based on the number of shares you own. Okay, so now let's take a look at dividend yield. It's really simple. You can see it up on the screen here. It is the annual dividend that the company is paying divided by the share price, and if you happen to buy the shares, it would be your purchase price. So in this example, let's say the company is paying a dividend of $1 per share annually and the share price today happens to be $20. So one divided by 20, we're gonna express that as a percentage, it's 5%. So what does that 5% really mean? So let's take a look. So let's say you had $20,000 to invest in this company. 5% of $20,000 is $1,000. So that means if you invest $20,000 in this company, you will receive $1,000 every year in dividends for as long as you own those shares and as long as the company continues to pay the dividend. And you could spend that money if you wish, or you could reinvest it. It's entirely up to you. The dividends are deposited as cash into your trading account. So another way to look at this is the same $20,000 if you were going to invest in this company and I've already told you the share price is $20. That means you can buy a thousand shares. So a thousand shares multiply by the dividend of $1, gives us the exact same number that I just mentioned before and that comes out to $1,000 in dividends each year. So whether you take 5% of your total investment or you calculate how many shares you're gonna buy and you multiply that by the number of shares, you're gonna come out to the exact same number. So the dividend yield is a very quick way to figure out what is the return on your investment while you hold on to those shares. We're not talking about selling them, we're not talking about buying low and selling high, just holding onto those shares. In this example, the return on your investment is 5% every year. Now remember, your dividend yield is based on your stock purchase price, right? So if this stock, you buy it today at $20 and the dividend is $1, then your dividend yield is gonna be 5%. If the stock price goes up to $100, well then the dividend yield is gonna be different for someone buying it at $100 a share versus buying it at 20. So your dividend yield is always based on your stock purchase price. So now let's take a look at just a couple of things here in the next section, which is what is important to you as a dividend investor, and the number one thing here what's important to us as dividend investors, is the dividend income versus the stock price. Okay, I'm gonna say that again. That's very important. Our focus and our priority is the dividend income and not the stock price. So you're probably wondering why. So let's take a look. You can see here we're looking at a company called Enbridge. You can see in blue or in purple, the stock price goes up and down all the time. We can see the stock price goes up, comes down, goes up again. We see big drops, especially in 2020, stock price dropped a lot and you can see it going up and down. However, take a look at the orange line. That line represents the dividend that the company paid out every year, and you can see that the dividend has gone up every single year after year after year. Okay, so the dividend is more important to us, because that is cash in your pocket, that's your dividend income. Stock prices can go up and down all the time and most people don't have time to sit around tracking stock prices, figuring out when to sell, when to buy, when to sell. The dividend is gonna provide stability and reliability to your portfolio and resilience. Let's take a look at an example here. So we're gonna look at two companies, company A and company B. You can see that both companies are in the same industry. The earnings per share is higher in company B. The debt is about the same in both companies. The payout ratio again 45%, 46% very close. The debt is around 12% for both companies. So that's the same. You can see the dividend is listed there. And the share price. So company A the share price is $64.65. Company B the share price is $128.33. So if you were just looking at the stock price, you might think that company A is going to be a better investment because it's cheaper right, it's half price here. However, there's one more thing to consider and that's the dividend yield. We just looked at it a couple of minutes ago. So company A has a dividend yield of 1.7%, company B has a dividend yield of 5.2%. And what does that mean in real terms. So, for example, if you were going to invest, if you had $25,000 to invest, if you put that in company A, you would expect to receive $425 a year in dividends. If you put the same $25,000 in company B, even though the stock price is double, you would earn $1,300 a year in dividends. So, all things considered equal, company B is going to be a much better investment because it is going to provide you with a higher return, regardless of the stock price, because, remember, the dividend is paid based on the number of shares you own and based on what the dividend is going to be. So, even though company B shares cost more, the dividend is higher and the dividend yield was much higher. Okay, so keep in mind, dividends can eventually cover your living expenses, because without dividends, you're only hoping for the stock price to keep going up, and there are stocks today that don't pay any dividends. So if you're going to invest in those, then you got to keep hoping and keep your fingers crossed that the stock price is going to keep going up or it's going to be up when it comes time for you to sell, when you need the money, right? So we don't want to rely on hope, because hope is not going to cover your living expenses, but dividends can, and so, again, I go back to dividends, and we're going to keep on providing us with stability and reliability and resilience in our portfolio. Okay, let's move on to our final topic here the dividend stock selection process. So I'm going to take you through a couple of real life examples and that's going to show you how the selection process works. So let me ask you this If there's a recession or there's a chance you may lose your job, are you going to go out and buy a new car? Of course not. You're going to keep the one you have. You're going to try and maintain it, or look at other modes of transportation public transit, maybe, right. You're not going to go out and spend 30, 40, $50,000 on a brand new car, and so, for that reason alone, we don't invest in car companies, and we saw what happened in March of 2020. General Motors cut their dividend to zero and they eliminated the dividend. So the key here is we want to invest in companies that are recession proof. So what's an example of a company that's recession proof? Well, think about this If there's a recession, if there's a market downturn or there's a chance you may lose your job. You still have to eat, so the companies that are providing those products and services will still be in demand even if there is a recession. They're still going to be making revenue and then they can afford profits from whereby they could continue to pay you a dividend. So focus on companies that are recession proof, because you're investing your hard-earned money for the future and you want to make sure your investment is still going to be around 10, 20, 30, 40, 50 years from now. Now let's take a look at one more thing here. In the selection process, we have a lot of examples of companies up on the screen and you have to try and figure out again, all things considered equal, which one is going to be a better investment. So here we're going to look at company A and we're going to look at the dividend per share paid out every year for the last 20 years, and you can see company A. Look at the graph. The line is just coming down, down, down and down. This graph gives me no confidence as to what is going to happen to the dividend next year. Most likely, dividend is going to go down, because for the last 20 years that's what it's been doing. I have no confidence that this company is going to increase the dividend or even be able to pay me a dividend in the next three to five years. Let's take a look at company B. Here you can see. Sometimes they pay a dividend, sometimes they reduce it, sometimes they eliminate the dividend, then they start paying it again and they increase it and then they reduce it again. It's completely random. So looking at company B, we can't even begin to predict. Is the company going to pay a dividend next year or the year after? Are they going to increase it? Are they going to decrease it? We have no idea. Let's take a look at company C Now. This is a nice graph. Over the last 20 years, the annual dividend per share has gone up consistently and it continues to go up. So out of the three companies, when I look at the three graphs, company C gives me a higher degree of confidence that they will continue to pay me a dividend in the future and hopefully increase it in the future. Like I said in the beginning, nobody can predict the future, but looking at these three graphs, company C gives me a higher degree of confidence. So, all things considered equal, company C is going to be a better investment. So the lesson here is invest in companies with a history of increasing dividends. Every time they increase the dividend, that's more money in your pocket. You don't have to go out and buy more shares, you just hold on to the ones you have and you are just going to receive more money every year in the future as the company increases its dividend. Now here are some examples up on the screen. This is Canadian companies. You can see that a lot of them have been increasing dividends consecutively for more than 25, 27, 30, 48, 50 years. There's a similar list for US companies. I'll give you an example. Coca-cola has consecutively increased its dividend for 62 years. Think about how many market crashes, how many recessions we've had, how many market downturns we've had in the last 20, 30, 40, 50, 60 years, but yet companies like these have continued to raise their dividend every single year. Another thing you'll notice on the list of companies here up on the screen some of these companies have been paying a dividend since the 1800s, so that is a remarkable and a very impressive track record. Okay, one more thing. We're going to take a look at the last thing in our selection process here. I'm going to give you two sample companies and again think about which company is going to be a better investment. Now we're going to look at the long-term debt-to-equity ratio. So let's start with company A. You'll see that it's very similar to company B. They're both in the same industry retail. They both have very similar earnings per share. We have $2.45, and then company B has $2.17. The dividend is close, almost a dollar. The dividend yield is 3.5% versus 3.2%. Very close Payout ratio. Very close 46% versus 45%. But now let's take a look at the long-term debt-to-equity ratio. Company A has a debt of 3%. Company B has a debt of 487%. Now what's wrong with having too much debt? What's going to happen here is if there is a market recession, a market downturn or a market crash and we know that's going to happen. The market goes in cycles, so it's not a matter of if it's going to happen, when is it going to happen? When the next one occurs. So when the next one occurs and interest rates go up, similar to what we're seeing today, company B is going to have a very hard time paying off its debt. It's going to have a very hard time making those interest payments. When the interest rates double or triple, company B is going to struggle and when the market goes down, company B is going to have a very hard time surviving the market downturn. So, all things considered equal, company A is going to be a much better investment for you. So the lesson here is to invest in companies with low debt. So let's summarize the three things we looked at Want to invest in companies that are recession proof. You want to invest in companies that have a history of growing their dividend and you want to invest in companies that have low debt. So does that mean that we're done? You can go out and buy any company that matches those three criteria. Not so fast, not just yet, because there's a couple of other things we need to look for. Okay, so the three things that we looked for that we already showed you. Sorry, the three things I already showed you are part of my 12 rules for dividend investing, so you can see it up on the screen. Rule number four is the company recession proof. Rule number six does the company grow this dividend? That's what we looked at dividend growth, remember. And company sorry. Rule number eight is the debt less than 70%, because we looked at the long-term debt to equity ratio. So anything higher than 70%. We don't want to invest in that kind of company. So before you go out and invest in any company based on just the three rules, you want to look at all 12. So these 12 rules that you see on the screen here are basically your checklist. You want to make sure that before you invest in any company, it passes all of the 12 rules, not just some of the rules. It has to pass all of the 12 rules, and if a company fails even one rule, you skip it, move on to something else. So rule number one do you understand how the company is making money? If not, skip it, move on to something else. Rule number two 20 years from now, will people still need it products and services? Rule number three does the company have a low cost competitive advantage? Rule number four we already talked about in this episode is the company recession proof? Rule number five is it profitable? Rule number six we already talked about in this episode as well. We looked at the last 20 year history of the company's dividend growth. Rule number seven can the company afford to pay the dividend? Rule number eight again, this is something we covered in this episode. We look at the long-term debt to equity ratio and it must be 70% or less. Rule number nine we want to avoid any company with a recent dividend cut. Rule number 10, does the company buy back its own shares? Rule number 11 is the stock priced low, and that's in three parts we have. We look at the PE ratio we want to make sure it's low. We look at the current dividend yield compared to the company's average 20 year dividend yield and we want to make sure the current yield is higher than its 20 year average. And then we look at the price to book ratio we want to make sure that's low. If the company passes all those three conditions, it then passes rule number 11. And rule number 12, keep your emotions out of investing. Now the biggest question I get is does this really work, this concept of investing in dividend stocks, holding onto the dividend stocks for the long-term and focusing on companies that have a history of increasing dividends? And the short answer is yes. So I'm going to share with you very quickly just two real life examples. First one is Coca-Cola. So if you were to have invested $4,600 back in 1960 in Coca-Cola, that investment today would be worth over $7 million and, even more important, that investment alone would now pay you over $200,000 in dividends each year. Now if we take a look at the next example Home Depot $2,100 invested in Home Depot in 1981, today would be worth over $10.8 million and those dividends in Home Depot today would be providing you with over $259,000 a year in dividends. So if you're interested, I suggest you go back and watch episode 7. That's where we cover these examples, plus another company, in detail and we show you exactly all of the numbers and how the investments grew to this size and how they're able to return that much money in dividends every year to its investors. So keep in mind our approach is to invest safely and reliably. So how do we do that? We invest in quality dividend stocks when they're priced low. So not just any stock. Make sure it's a quality stock and not just at any price. Make sure the stock is priced low. So how do you know when you're looking at a stock anywhere in the world? How do you know when you're looking at it, that it's a quality stock and it's priced low? So for that I've created the 12 rules of Simply Investing and we just covered those a couple of minutes ago. So for those of you that are interested. I've created the Simply Investing course. It's an online course, it's self-paced and it's in 10 modules video modules that you can watch and in module one, I cover the investing basics. In module two, I cover the 12 rules of Simply Investing in detail. In module three, I show you how to apply the 12 rules using a Google Sheet, which I also give you. Put all the numbers in the Google Sheet will automatically highlight which companies fail which rules, which companies pass which of the rules. And then, in module four, I show you how to use the Simply Investing platform. In module five, I show you how to place your first stock order. In module six, I show you how to build and track your portfolio. In the next module, you learn when to sell, which is just as important as knowing when to buy. And the next module is to reduce your fees and risk, especially if you have mutual funds, index funds and ETFs. Module nine is I will give you your action plan to get started right away. And module 10, I answer your frequently, most frequently asked questions. And for those of you that want to go a little faster or don't have time to take the course, the Simply Investing platform I've built it's taken two to three years to build. It is a web application. It automatically applies these rules to over 6,000 companies in the US and in Canada and anytime you log in you can immediately see which companies pass which rules, which ones fail, which are the rules. So you know which companies to consider and which companies to avoid. So for those of you that are interested, you can write this down. The coupon code is save 10, save10. It's going to save you 10% off of the Simply Investing course and off of the Simply Investing platform. If you enjoyed this episode, be sure to hit the subscribe button. There's new episodes out every week. Hit the like button as well, and for more information, take a look at our website simplyinvestingcom. Thanks for watching.