Long-Term Investing When You're Scared Witless

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Now's a tough time to invest. Between the flak over the debt ceiling debate, and the potential long-term downgrade of the U.S. credit rating even if the ceiling does rise, the near term clearly looks shaky. That fear is palpable enough to take the blame for what may end up being the market's largest weekly drop in about a year.

If that weren't bad enough, the inflation rate of 3.6% has been outpacing average wage raises of 2.9%, which means the average person's salary is losing ground to the daily cost of living. Between the market's downturn and costs rising faster than wages, ordinary people are losing on all sides.

Scared yet?
In this environment, it's easy to be scared completely out of your wits. If you've got less money to begin with, and handing that money to the market quickly reduces it even further, your natural inclination might be to stop investing altogether.

Waiting for sanity might seem smart, but in reality, it could end up costing you more in the long run. As Warren Buffett said, "The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values." He said that in 1979, not that long before the multi-decade bull run that began in 1982, which should provide a ray of hope amid the current gloom.

As usual, Buffett is right. As you invest in stocks, you turn your dollars into shares representing ownership stakes in companies. The more shares each dollar buys, the better off you wind up as the companies ultimately grow and reward their shareholders for their investing risks.

Get your long-term rewards
This benefit of buying low is easiest to see with companies that both pay decent dividends and are willing to raise those dividends. Take a look at these, for instance:


Closing Price on 7/28/2010

Closing Price on 7/28/2011

Annualized Dividend on 7/28/2010

Annualized Dividend on 7/28/2011

Payout Ratio

PepsiCo (NYSE: PEP  ) $65.20 $63.89 $1.92 $2.06 48%
Medtronic (NYSE: MDT  ) $36.45 $35.98 $0.90 $0.97 31%
Emerson Electric (NYSE: EMR  ) $50.44 $49.62 $1.34 $1.38 43%
Target (NYSE: TGT  ) $51.80 $50.43 $1.00 $1.20 22%
Aflac (NYSE: AFL  ) $49.52 $45.98 $1.12 $1.20 26%
Waste Management (NYSE: WM  ) $34.12 $32.68 $1.26 $1.36 66%
Best Buy (NYSE: BBY  ) $35.14 $27.94 $0.60 $0.64 19%

Data from Capital IQ and Yahoo! Finance as of July 28.

They're among the few stocks whose shares have fallen over the past year, despite both increasing their dividends and restricting those payments to less than two-thirds of their earnings. Those respectable payout ratios give these stocks the ability to reinvest cash for their future growth while still providing direct and increasing rewards to their owners today.

That combination of lower share price and higher dividends means that every dollar invested today buys even more income than it would have a year ago. Check out just how great than gain can be:


Annualized Income Bought by $1000 invested on 7/28/2010

Annualized Income Bought by $1000 invested on 7/28/2011

% Change in Annualized Income

PepsiCo $29.45 $32.24 9.5%
Medtronic $24.69 $26.96 9.2%
Emerson Electric $26.57 $27.81 4.7%
Target $19.31 $23.80 23.3%
Aflac $22.62 $26.10 15.4%
Waste Management $36.93 $41.62 12.7%
Best Buy $17.07 $22.91 34.2%

Data from author calculations based on above Yahoo! Finance data as of July 28.

Factors like that make long term investing so much more profitable when the market is jittery than when you're paying that high price for a cheery consensus.

But are they worth owning now?
Of course, no stock is worth buying at any price if the company behind it is expected to fail. Thankfully, none of the companies above are on that track. In fact, they've each got a lot going for them from an investor's perspective.

Pepsi, for instance, is a leading food, snack, and beverage company that trades at a respectable 13 times forward earnings. Medtronic looks cheaper, trading for less than 10 times its expected future income, and it's part of an industry (medical devices) that's far less exposed to the economic cycle. Emerson's 120+ year history means it survived the last Great Depression, while its price around 13 times forward earnings gives investors a decent value today.

Likewise, Target's strategy of "cheap chic" serves it well when people want to feel classy without spending a ton of money. And Aflac's quacking duck carries the promise of help for people who physically can't work, while the company itself trades at an astonishingly low seven times forward earnings. Similarly, while you may not technically need the stuff that Best Buy sells, it also trades below eight times forward earnings, a reasonable price for investors to pay.

And finally, from the perspective of things you can't live without, imagine life without the services of a garbage hauler like Waste Management. Then realize that you can buy the company for less than 13 times its expected future earnings, and smile.

Ultimately, to invest through a market panic, you've got to keep your eye on the long term-strength of the companies you own. As long as you own fundamentally strong companies with solid staying power, continuing to buy when things look the bleakest simply sets you up that much better for the future.

At the time of publication, Fool contributor Chuck Saletta did not own shares of any company mentioned in this article. The Motley Fool owns shares of Best Buy, PepsiCo, Medtronic, and Waste Management. Motley Fool newsletter services have recommended buying shares of PepsiCo, Emerson Electric, AFLAC, Waste Management, and Best Buy, as well as creating a diagonal call position in PepsiCo. 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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