I pay more attention to stock prices when markets decline than when they increase. When markets decline, it is possible to find stocks on sale. Low prices mean potential bargains.
When stocks advance, the opportunity for bargains decreases, or even disappears. Of course, successful companies keep on doing business during hard times and good times. But it is when prices decline, that opportunities for “buying low” can exist.
Why Buy Low
In some ways it is obvious what “buying low” is a good thing. If you someday plan to sell, buying as low as possible is, or should be, the name of the game. However, if one buys for dividend income, what difference does buying low make?
Buying Low For Dividends
When buying a stock for dividends, and subsequently reinvesting dividends, there are a number of factors to consider. Aside from the viability of the company and our assessment of its financial capability to grow itself and its dividend, we also look at its dividend yield, and and other things. Let’s look at an example.
In our hypothetical company, let’s say the stock price is $50.00 and its yield is 2%, or $1.00 per year per share, or $0.25 per quarter. Let’s say the price declines to $25.00 per share but the dividend remains the same. In such a case, the stock’s dividend, still $1.00 per year, or $0.25 per quarter, but now yields 4% per year.
If you are a dividend investor who reinvests dividends, every time a dividend is issued, it buys you more shares (or parts of a share) when the price declined.
More Detail
Let’s look the the reinvestment results at both prices. Let’s say that in both cases you own 100 shares. So your total income is $100.00 per year, or $25.00 per quarter.
At $50.00 per share price, your $25.00 quarterly income can buy half a share. But when the stock price declines to $25.00, your quarterly income of $25.00 buys one full share.
When the price declined 50%, you actually doubled the amount of shares your dividends buy.
These examples hold true for the first dividend. When you buy more shares, or parts of a share, with your dividends, those newly added shares increase the subsequent dividends you will receive.
And of course, the above is a hypothetical example, as stocks do not normally move in such simple amounts. But the example illustrates the powerful results of buying low when dividend investing.
Perception
So I pay attention when stocks decline. I do not realistically usually expect a 50% decline, although sometimes dramatic things happen, especially during a broad sell-off in a bear market. Also, note in the above example, “successful companies keep on doing business during hard times and good times.” One must assess whether market declines and general economic conditions will affect a company’s ability to maintain its dividend, or pay one at all, or even stay in business. Risks and opportunities equally abound.
Do you panic or buy when prices decline? Comment here.
The illustration of the 1779 eruption of Mount Vesuvius in Italy was made by Peter Fabris for William Hamilton’s “Campi Phlegraei” (1776–79). Courtesy Wellcome Library, London, UK. While the most famous eruption of Mt. Vesuvius was in 79 AD, it actually has erupted numerous times over the centuries. Notable eruptions were in the years: 203, 472, 512, 787, 968, 991, 999, 1007, 1036, 1631, 1660, 1682, 1694, 1698, 1707, 1737, 1760, 1767, 1779, 1794, 1822, 1834, 1839, 1850, 1855, 1861, 1868, 1872, 1906, 1926, 1929, and 1944.
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