If you believe stock market crashes are normal, then pat yourself on the back because you know your history. Since the year 2000, the S&P 500 has entered a bear market (defined as a drop of 20% or more) three different times. It's pulled back at least 10% a handful of other times. Therefore, since we know these things happen every few years on average, it's smart to be aware and prepared for pullbacks.
That said, it can be a big mistake to wait for a market crash to buy stocks. Famous investor Peter Lynch once said: "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves." To this quote, I'd add that it can be particularly detrimental to wait to buy high-quality growth stocks.
Take PayPal Holdings stock, for example (I'm cherry-picking to more vividly illustrate my point). Investors and analysts alike have gawked at its seemingly pricey valuation for years. But this is a top company riding a monumental global trend: The digitization of cash and commerce. In 2015, it hit the market for $38 per share. Almost six years later, PayPal stock is at about $240 per share, representing a compound annual return of about 35%.
Consider PayPal stock once went more than three years without a single pullback of 20%. Therefore, like Lynch said, you'd have lost more money waiting on a PayPal pullback than you would have lost if you'd bought at the beginning and then suffered the eventual decline.
For this reason, there are many top growth companies like PayPal that I would not wait another minute to buy. However, there's a handful of other stocks that can be game-changing investments when the market does crash. Specifically, in this article, I'm talking about quality dividend stocks. For me, The Home Depot (HD 0.27%), PepsiCo (PEP -1.83%), and Starbucks (SBUX -1.83%) are three dividend stocks I'd absolutely recommend buying if the market crashed tomorrow.
Here's why I've picked these three
With dividend stocks, investors often fixate on the dividend yield (the annualized dividend per share relative to the stock price), and we'll get to that in a moment. But there's something I believe is more important than the yield. Businesses must continue to execute and grow long-term if they're going to be sustainable dividend stocks. And Home Depot, PepsiCo, and Starbucks each fit this description in my opinion.
Home Depot operates in a resilient industry -- no matter the state of the economy, homeowners continue to spend for ongoing maintenance. The company is top-of-mind for homeowners, but it's also popular among professionals. Consider that pro customers increased spending by double digits in 2020 and management sees a growing backlog of projects in 2021 to keep operating results strong going forward.
For its part, there aren't many companies as diversified as PepsiCo. The company sells packaged foods, snacks, and beverages all around the world and you can always count on people eating and drinking. And even if consumer preferences evolve over time, PepsiCo can evolve with them, as evidenced by the company's recent deal with Beyond Meat for developing plant-based snacks and beverages. In short, I'm willing to bet millions of people are still buying PepsiCo products 10 years from now.
Finally, Starbucks' business needs no introduction, but perhaps its 10-year plan does. It currently has around 33,000 locations, which is a monster chain already. But by 2030, management plans to have 55,000 locations, making it the largest restaurant company in the world.
To get there, Starbucks will use a prudent mix of full-size locations and scaled-down, delivery-only stores, depending on which makes the most economic sense. For this reason, I feel confident the company will achieve profitable growth over the next decade.
Here's why I'd buy if there's a crash
We've now established that Home Depot, PepsiCo, and Starbucks are quality companies. But the chart below illustrates why buying during a market crash could be an excellent move.
When the stock market crashed in 2020, the dividend yield for these three stocks spiked to multi-year highs. If you purchased shares of these companies then, you locked in a historically rare dividend. And whether you invest in dividend stocks to generate income or are using an automatic dividend reinvestment plan (DRIP), that 0.5% to 1% improvement to the overall dividend yield can put you ahead by years.
To be fair, there was reasonable uncertainty about the future of these dividend payouts when the market crashed. However, none of these companies suspended or paused dividend payments in 2020 due to the resilience of their businesses. In fact, not only did Home Depot, PepsiCo, and Starbucks continue paying their dividends in 2020, each also announced a raise to the quarterly dividend during the past 12 months, raising it 10%, 5%, and 10% respectively. And remember these three companies habitually raise their dividends annually.
Waiting for a market crash is the wrong move in many cases. But when it comes to resilient dividend payers like Home Depot, PepsiCo, and Starbucks, a market crash can be a great time to lock in an abnormally high dividend yield, turbo-charging your investment from the start.