What to Buy if the Market Tanks... More
Thursday, January 10, 2008 | Chris RoweRating:
What to buy, what to buy. Hmm. Well, everyone's been yappin' about Citigroup (myself included) because now they're paying about 8%. The company said they plan to keep the dividend, but many people are doubting that. Okay, okay, okay - whatever. Forget about it for now. But let's focus on the point here...
There are some stocks out there that just might get hammered that will rebound at some point. And some of your favorite stocks that were paying 2% dividends before getting the you-know-what kicked out of them by the general market are going to continue paying the same dividend - dollar wise. But since the stock is cheaper, the dollar amount will yield you a lot more on a percentage basis than it did before.
For example, let's look at Verizon (Symbol: VZ). The dividend is $1.72/share. That's over 4% of the price of the stock. Now if you have a custodial account for your kid or any other kind of account that you want to buy mature companies in, you might keep a stock like Verizon in mind if the market tanks.
(That's right, this could get worse.)
Look at this chart of Verizon. If the stock breaks support at $40.00 (especially on heavy volume), it could drop another 10% giving us a 5% yield.
I'm not pitching Verizon here, folks. I'm just saying that if this market gets much worse, don't forget that some stocks that pay 4% today will pay 6, 7, 8% or more. When you buy at multi-year lows, or when you buy very cheap even when it's not the bottom, and you have to wait a "long time" for the return, just remember that long-term profits are much cooler than short-term profits from a taxation standpoint.
Here's how you want to think about this market...
You want to position yourself so that you would absolutely LOVE to see the market tank. I personally would skip to work if the market crashes (and I usually roll to work in a wheelchair). I have a number of bearish positions open right now that would definitely ease the pain of seeing my bullish positions drop in a bad market. And if the market drops far enough, I might make 200 - 300% on the bearish trades, which is good even if I lose 100% on the bullish trades. We would then have historic buying opportunities to buy cheap stock (or deep in-the-money call options, where you can make thousands of percentage points with the long-term tax benefit).
Back to the point...
What happens if we are lucky enough to see a stock that pays 4% get cut in half? That gives us an 8% yield as long as the company continues to pay the dividend. This is a great deal for tax-deferred accounts like IRAs especially because you can just keep reinvesting that 8% dividend into the same stock (or other stocks).
In 2003, Teeka Tiwari suggested I buy JP Morgan at $20.00 when it was paying a 6.8% yield. In 12 months, the stock was at $44, and a few years later it was at about $53.00!
What else can we do with a fat yield? Depending on how fat it is, we can use the money to buy protective put options on the stock and guarantee ourselves zero downside risk. Another way to play it is to sell covered calls against the stock. Doing that with a high yielding stock can easily net you 15-20%/year without the stock even moving.
It's hard to say today what would make the most sense to buy in the future. But you may already know that my style is to buy stocks that are in sectors that show positive relative strength vs. the general market, and I prefer the stocks that are showing positive relative strength vs. the sector they are in.
Keep a level head. If we enter a bear market, you should be happy about it because you should position yourself to profit from it.
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“Profit from the Trend”
Chris Rowe
Chief Investment Officer
The Trend Rider
