How to Beat the Coming Bear Market

I don't know when we'll see the next bear market. But like you, I know it's coming ... it's not a matter of "if" but rather a matter of "when." And today, I'll tell you how you can prepare your portfolio so that you'll not only survive the bear intact but also be better off than if it never happened at all.

Siegel says
We had the pleasure of hearing one of the world's great investing minds deliver the keynote speech at a recent Fool investing seminar. Wharton professor Jeremy Siegel is well known for his book Stocks for the Long Run, and his latest -- The Future for Investors -- is another classic. In this book, Siegel lays out the secret for successful investing through all market cycles, and it's in complete agreement with what James Early teaches in the Motley Fool Income Investor newsletter.

It all boils down to the incredible importance of owning dividend-paying stocks and of reinvesting those dividends. It's a concept I wrote about last fall in "The Greatest Investing 'Secret.'" Today, I want to expand on this by showing how bear markets can actually help your returns.

Dividend-paying stocks act, in Siegel's words, as "bear-market protectors" and "return accelerators" during down markets:

  • Dividend yield is a huge factor when it comes to actual returns. The yield is simply the dividend per share, divided by the price. So a $100 stock that pays $2 in yearly dividends has a yield of 2%. When stock prices fall, yields obviously rise as long as companies don't cut their dividends at a greater rate than the price drop.
  • When those dividends are reinvested, they purchase more and more shares at lower prices during a bear market. These extra shares act as a bear-market protector.
  • Then, when share prices reverse, the extra shares act as a return accelerator and rocket total returns higher.

Beating the Depression
The greatest example of how all this works involves the stock market crash of 1929 and the Great Depression that followed soon after. On Sept. 3, 1929, the Dow Jones Industrial Average hit 381 -- and it did not reach that level again until November 1954. That's an incredible rough patch that pained investors for a full 25 years.

As I pointed out in my previous article, Siegel explained the surprising truth that the average stockholder who reinvested dividends actually showed a positive return of more than 6% per year during that 25-year period, easily beating the performance of bonds and short-term treasuries. Think about that the next time you hear someone say it took 25 years for stock investors to break even during that period. That's true only for those who didn't reinvest their dividends!

Siegel has additional (and surprising) revelations:

  1. If the Great Depression had never occurred, and if dividends had made a smooth ascent while stock prices remained stable, things would actually have been far worse for long-term stock investors. That's because $1,000 invested at the beginning of this fictional, stable period would have turned into only $2,720 by November 1954. That's 60% less than what dividend reinvestors actually accumulated in real life.
  2. A dividend-paying stock that falls will recover its total value even if the price never recovers, and that's because of the extra shares purchased (bear market protector). In fact, the greater the fall, the fewer the number of years it takes to reach breakeven status. And, of course, if the price recovers, the gains are magnified because of the extra shares (return accelerator).

Thus, you can see that periodic bear markets are actually very beneficial to long-term dividend reinvestors. Siegel illustrated this with a case study of Philip Morris (now Altria Group (NYSE: MO  ) ). Because of bad publicity and lawsuits, the cigarette maker's price was the same in March 2003 as it was 12 years before. Yet those who reinvested their dividends earned an average of 7.1% per year throughout that period. Then, when the stock price recovered, reinvestors had twice the number of shares than they had 12 years before.

Good for bulls, too
Finally, to convince you that owning strong dividend-paying companies is a no-brainer, these stocks perform well across all market cycles. Consider that the 20 best-performing survivor stocks from the original S&P 500 in 1957 are all dividend-payers. Here is a small sampling of these "corporate El Dorados," as Siegel calls them, and their returns during his 1957 to 2003 study period (dividends reinvested, of course):

Company (2003 Name)

Dividend yield

Annual return

$1,000 invested

Philip Morris




Tootsie Roll (NYSE: TR  )




Merck (NYSE: MRK  )




Crane (NYSE: CR  )




Fortune Brands (NYSE: FO  )




Procter & Gamble (NYSE: PG  )




Royal Dutch Petroleum (NYSE: RDS-A  )




S&P 500




Source: Jeremy Siegel, The Future for Investors.

Foolish bottom line
Siegel sums it up nicely: "Bear markets are not only painful episodes that investors must endure; they are also an integral reason why investors who reinvest dividends experience sharply higher returns."

This is the essence of what James searches for every day in Income Investor -- stable dividend-payers designed to weather any market cycle. If you'd like to try out the service and get the full list of his market-beating recommendations, you can do so free for 30 days. There's no obligation to subscribe.

This article was originally published March 14, 2006. It has been updated.

Rex Mooreis no relation to Rex Kwan Do in Napoleon Dynamite. He owns no companies mentioned in this article. Merck was once an Income Investor recommendation. The Motley Fool is investorshelping investors.

Read/Post Comments (0) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 511895, ~/Articles/ArticleHandler.aspx, 10/22/2016 10:04:17 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 12 hours ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:02 PM
CR $60.43 Down -0.25 -0.41%
Crane CAPS Rating: ****
FO.DL2 $0.00 Down +0.00 +0.00%
Fortune Brands CAPS Rating: *****
MO $63.70 Up +1.85 +2.99%
Altria Group CAPS Rating: ****
MRK $61.20 Down -0.72 -1.16%
Merck and Co. CAPS Rating: ****
PG $84.33 Down -0.60 -0.71%
Procter and Gamble CAPS Rating: ****
RDS-A $50.82 Down -0.17 -0.33%
Royal Dutch Shell… CAPS Rating: ****
TR $34.45 Down -0.03 -0.09%
Tootsie Roll Indus… CAPS Rating: ***