We all hate bear markets. It's difficult to watch while stocks drop and savings disappear. But for most investors, bear markets should be exciting times -- and that's especially true if you're a dividend investor.
Here's why ...
All things being equal, when stock prices drop, dividend yields increase because you're paying less to buy the same stream of dividend payouts. For example, Bank of America's stock yielded a little more than 4% this time last year. Thanks to the company's recent dividend increase and falling stock price, shares currently yield more than 7%!
So you're now able to buy a bigger stake in the company and get a larger dividend payout for the same amount of money. That, in short, is why investors should get excited about bear markets. Just take a look at how yields on some stalwarts now compare with their five-year average:
|
Company |
5-Year Average Dividend Yield |
Current Dividend Yield |
|---|---|---|
|
3M |
2.0% |
2.6% |
|
Wal-Mart |
1.2% |
1.9% |
|
Pfizer |
3.3% |
6.2% |
|
GlaxoSmithKline |
3.1% |
6.1% |
|
Circuit City |
0.7% |
4.3% |
|
HSBC Holdings |
4.0% |
10.1% |
Data from DividendInvestor.com.
Precipitous pitfalls
Now, to be forthright, a high dividend yield alone is not sufficient to judge whether a company is a good investment. In fact, a high yield could indicate underlying trouble if a company does not possess:
- 1. A dividend fully funded through free cash flow.
- 2. Improving operational returns.
- 3. Manageable debt (less than 60% of capital).
- 4. Financial strength to continue growing and paying its dividend.
If these aren't present, the company may be a dividend-paying stock you want to avoid.
Here at the Fool, dividend gurus Andy Cross and James Early scour the market every month for the best high-yielding stocks of the moment -- and thanks to the bear market, they're now picking among some pretty great companies.
You can see the companies they're recommending today by clicking here to try Income Investor free for 30 days.
This article was first published Jan. 5, 2008. It has been updated.
Fool analyst Adam J. Wiederman owns no shares of any company mentioned above. 3M, Wal-Mart, and Pfizer are Inside Value recommendations. Bank of America, Pfizer, and GlaxoSmithKline are Income Investor recommendations. The Motley Fool's disclosure policy is here.
