Sometimes, the best time to buy stocks is when everyone else is afraid to jump aboard. That's easier said than done, of course, as not all stocks recover from a significant price drop. And the reason (or reasons) behind the price drop can also complicate matters.
Right now, the S&P 500 Index is in bear market territory and plenty of great stocks are being dragged down along with it. Investors are worried that rising interest rates to combat outsized inflation could lead to a recession. Short-term traders are feeling significant pressure.
But if you are a long-term investor, bear markets present an opportunity if you know where to look. The bear market will eventually end (they always do) and savvy investors can profit from buying and holding stock for great companies currently trading at a discount. For instance, long-term investors will probably want to look at Bank of Montreal (BMO -0.29%) and Franklin Resources (BEN -1.85%) in this bear market. The two financial institutions have real potential for gains.
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1. Bank of Montreal: Ready for the hit
Bank of Montreal, or BMO as it is more commonly known, is a Canadian bank with exposure to both its home country and the United States. Canada is known for having a fairly insular and conservative banking market. So BMO, one of the largest financial institutions in the country, isn't likely to lose its place in the markets it serves because Canadian regulators have, more or less, protected the industry's leaders from real competition. That means it has a solid core business in its home market, which makes up around 60% of its net income.
At the same time, Canada doesn't offer particularly robust growth, at least partly because of all the regulation. That is why the remaining 40% or so of net income from the United States is so interesting here. This is a country in which BMO can still grow, noting that it agreed to acquire Bank of the West in late 2021. All in, the company is the eighth-largest bank in North America.
The really big story, however, is the company's Tier 1 Capital Ratio, which sits at 15.8%. That's exceptionally high on a measure where bigger numbers suggest that a bank is better prepared to deal with business headwinds. So BMO is a bank stock with a solid core that is well prepared for a recession. And you can collect a historically high 4.7% dividend yield while you wait out the financial storms. Note, too, that BMO has paid dividends longer than any other Canadian company, with a 193-year streak of uninterrupted payments.
2. Franklin Resources: This, too, shall pass
Next up is Franklin Resources, which is an asset management firm. That current yield is a historically elevated 4.9% or so. The dividend has been increased annually for a huge 42 consecutive years, making it a Dividend Aristocrat. That's the good news, but keep it in mind.
Franklin Resources' business is directly tied to the performance of the stock market in two ways. First, it charges fees for overseeing other peoples' money. The value of the assets it has under management goes up and down with the market, so today, during a bear market, it is earning less money because it has fewer assets to manage. Then there's investor psychology, which often leads investors to pull money out of the market during downturns, further reducing Franklin Resources' assets under management.
The company earned $0.50 per share in the fiscal third quarter of 2022, down 26% from the same quarter in 2021. That's not good, and it helps explain why investors have pushed share prices down by 30% so far this year (thus pushing the yield higher). However, even at that low level, quarterly earnings easily covered the $0.29 per share per quarter dividend. In fact, the payout ratio, despite the headwinds, remains a solid 60% or so.
And, given the basic model here, when the market turns higher again, as history suggests it eventually will, Franklin Resources' business should quickly improve. Just remember that the market has seen massive ups and downs over the past four-plus decades, and that didn't derail Franklin Resources or its dividend.
It can be profitable to take a contrarian view
It's not easy going against the grain on Wall Street, but you can sometimes find the best opportunities when you do just that. Right now Bank of Montreal is prepared for an economic downturn and offering a big yield. That's a good combination for patient dividend investors. Franklin Resources, meanwhile, is getting slammed by the bear market, but that's just par for the course at this successful asset manager. If you can wait out the downturn, you'll get paid well with the currently generous dividend yield.
