What If the Market Stays Closed?

Hurricane Sandy shut down the U.S. stock markets yesterday and today. This storm marks the first time in nearly three decades that the weather has shut down the exchanges, throwing traders for a loop. If the market reopens tomorrow as currently anticipated, wild swings are possible, driven by the weather, the release of earnings delayed by the storm, and general month-end professional money manager actions.

The thing to remember, though, is that no matter how wild the trading day may be, when all is said and done, Hurricane Sandy is still just a major "one-time event" that affects companies for a short while. A few unprepared or undercapitalized companies may completely fail, but they'll be the exceptions rather than the general rule. After the storm passes, the damage gets cleared, and people and businesses rebuild, things will generally be back to "business as usual."

Take a breather -- and evaluate what you own
If you or your family has been affected by Sandy, taking care of them is priority No. 1, of course. If, on the other hand, you've been left largely unscathed by this disaster, the two-day trading hiatus may be just what you need to look at what you already own and decide if it's still worth owning.

After all, as Warren Buffett said, "If, when making a stock investment, you're not considering holding it at least 10 years, don't waste more than 10 minutes considering it." If you have the chance to look over your portfolio while the market is shut down, ask yourself how comfortable you would be owning those stocks if the market stayed closed for years rather than days.

It makes a difference. As an investor, you have two general ways to get rewarded for the risks you're taking. You can either:

  1. Hope the share price goes up, giving you more for your slice of the company than you paid, or
  2. Insist on a direct reward in the form of a dividend, paid out of real earnings.

If the only reward you're getting comes from hoping the share price goes up, then you'd be in real trouble if the market were to shut down for Buffett's proverbial 10 years. Indeed, dividends are about the only way you can be rewarded for the risks you're taking from owning a company -- unless you're willing and able to sell that ownership stake (and thus, stop being an owner).

Follow Buffett's lead
In fact, if you look at some of the biggest companies whose stock Buffett owns through Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) , the insurance company he leads, you'll find dividends aplenty. Beyond just paying dividends, though, you'll find companies with dividends that are well covered by actual earnings, a history of actively raising those dividends, and a solid financial foundation to keep those payments coming. From Berkshire Hathaway's most recent disclosure of its holdings:

Company

Projected 2012 Dividend

2007 Dividend

Debt to Equity Ratio

Payout Ratio

CVS Caremark (NYSE: CVS  )

$0.65

$0.23

0.2483

21%

Coca-Cola (NYSE: KO  )

$1.02

$0.68

0.9744

52%

General Dynamics (NYSE: GD  )

$2.00

$1.10

0.275

29%

United Parcel Service (NYSE: UPS  )

$2.28

$1.68

1.6996

64%

Wal-Mart (NYSE: WMT  )

$1.59

$0.88

0.7366

32%

Holdings data from Berkshire Hathaway's August 2012 13-F SEC filing. Other data from Yahoo! Finance, as of Oct. 29, 2012.

In spite of the fact that they're in businesses as diverse as defense, package delivery, beverages, drugstores, and general retail, what ties them all together are the following key features:

  • Dividends that are higher now than before this economic mess started at the end of 2007.
  • Payout ratios below two-thirds of earnings -- indicating sufficient retained earnings to reinvest in the company's future.
  • Debt to equity ratios below 2, indicating that they haven't overleveraged themselves to juice returns, helping keep them away from an excessive risk of failing in the next financial crisis.

In short, they all share many of the key characteristics that make them worth owning if the stock market were to remain closed for the next decade.

Are your stocks worth owning?
As you enjoy your second straight forced day off from trading, ask yourself what the companies in your portfolio are worth to you as businesses, rather than as streaming bits of electronic quoted prices. If you can only justify your ownership by the belief that someone else will pay you more for the stock later, then you don't have a company whose shares you're prepared to hold for a decade.

If that's the case, then consider the flip side of Buffett's advice, and ask yourself whether that stock is worth considering for even 10 minutes. Because you never know when the market may be shut down next.

If you're interested in dividends like these on your quest for stocks worth owning while the market is shut down, The Motley Fool has compiled a special free report outlining our nine top dependable dividend-paying stocks. It's called "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your copy today at no cost! Just click here to discover the winners we've picked.

At the time of publication, Fool contributor Chuck Saletta had no positions  in the stocks mentioned above. The Motley Fool owns shares of Berkshire Hathaway and General Dynamics. Motley Fool newsletter services recommend Berkshire Hathaway, Coca-Cola, United Parcel Service, and Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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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.

  • Report this Comment On October 30, 2012, at 11:53 AM, Seanickson wrote:

    I agree with buffett in the sense that you should only own companies whose value will be propeled by business success and not by changes in valuation. However, many of us do not have the tax implications that berkshire has. I have most of my money in retirement accounts so i dont have the 35% tax on gains that berkshire has. I thing buying good companies to hold is the right strategy but sometimes conditions warrant a change.

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