Tuesday, October 14, 2008

Bear Markets Increase Yields

Anyone notice that the market has been falling? In all seriousness thought, there is a silver lining to a bear market for dividend investors who are focus on growing the income in their portfolios. It is really simple - as prices of dividend stocks fall the dividend yield of those stocks increase. At the outset this may seem like a very simple concept - the real basic of dividend investing fundamentals. So why am I wasting your time talking about it here? Because it is Let's look at a simple example.

The stock I will look at is Coca-Cola, one of the dividend stocks that I hold in my personal portfolio. Here is the company's dividend yield on June 11th and October 10th of this year - a time period that represents the price of the stock before and after this full blown bear market we are seeing right now.

Share price June 11, 2008
Dividend Yield
Share price October 10, 2008
Dividend Yield

As a dividend investor this is the best type of scenario we can hope for, especially those of us in the wealth accumulation period of our lives. As buyers, we are in effect getting a better yield on these companies than when prices are higher. Therefore, dividend investors actually want to see higher yields.

There is a catch though - it is imperative that investors buying individual stocks be vary cautious about the dividend stocks they are buying. The biggest risk is a company that cuts its dividend, such as we have seen with Bank of America (another one of my holdings). Before the cut BAC was showing a huge increase in yield, but not so much now. We want to invest in stable and less risky stocks with little chance of seeing a dividend cut. That is the hard part.

This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.

1 comment:

  1. Any thoughts on whether closed ended funds like NFJ might cut their dividends due to bear market conditions?


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