Trading Dividend Stocks in a Bear Market
There are many choices to make during a bear market. You can exit your positions, hold on to cash, short the market, or trade other instruments like buying gold. However if you keen on trading only the stock market and your trading style is a generally a buy and invest type, trading dividend stocks is a good alternative. I have made a few findings that showed that trading dividend stocks in a bear market in a particular manner helps build a good portfolio. Here’s a few quick tips and an illustration of it’s benefits.
Step 1: Select high performing dividend stocks
If you are not familiar with dividend stock selection, refer to my article on Profiting with Dividend Stocks. Picking good dividend stocks will minimize your risk of losing big during a bear market as quality dividend stocks typically recover well and quickly when the market turns around. Select industries that generally are not too affected by market slow downs like telecommunications or food industries. People still need to use their phones, and eat food and drinks whether the markets is performing or not. Avoid volatile markets like mining and energy sectors.
Step 2: Calculate the lot size you can afford to purchase a fixed number of shares every month
There are a few things to take note here. You may have some savings and you may want to allocate a portion of it to purchase some dividend stocks every month. Or you can also allocate a portion of your salary to invest in a fixed number of shares every month. Be prepared to take a big draw down for your first few months of investments as you will not be timing the market. Hence, don’t be greedy and dump a big chunk into the market. Spread it out into small chunks. These small chunks should allow you to set relatively far stop loss points before you decide the stock is crashing out of hand. Quality dividend stocks however typically do not go into ruins. They tend to stand up against poor market conditions better than other stocks.
Step 3: Accumulate positions by buying in consistently every month
You can choose a particular date of a month to buy in without emotional influence, or you can put a limit order at a favorable price point to get in at a slight advantage depending on your chart analysis. End of the day, the trade got to be executed at around the same 1 month time frame to average out the market fluctuations.
While you are trying to accumulate a good quality dividend stock, take for example company X issues roughly 0.20 cents of dividend every year. It can be split into a few times a year but ultimately, it adds up to about 0.20 cents. The stock price before the start of the bear market is at $4.00. Your yield works out to 5% per year. During the course of the bear run, the price gradually falls by say $0.10 a month, meaning you accumulate positions at $4.00, $3.90, $3.80 and so on in the coming months. There will come a point when it starts reversing again. Say the bear run goes on for a year, your average position price will work out to be about $3.40 per share. Your yield with the same amount of dividend works out to about 6% from 5%. Quality dividend stocks also tend to recover pretty solidly during market recovery. You may be looking at about a 3-6 months of recovery to break even at $3.40 and should it recover back to $4.00, you stand to gain 18% from the stock price. All in all 18%gain plus 6% of yield, 24% in total. Pretty handsome returns in a close to 2 years investment, of course the period of investment is very much dependent on the market sentiments.
- Accumulate investments during bear market at risk level that you can manage buying low and selling high later in the future
- Enjoying yield while waiting for market recovery
- Stand to build up a strong portfolio when the market recovers
- The stop loss level will need to be significantly far at about 30-40% from pre-crisis price level. Therefore, good money management is critical.
- This will be a long term investment that may take 2-3 years to materialize full benefits
- This trading style may not be suitable for all, as it can be mentally tormenting to see your stocks in the red for a significant period of time.