The Best Income Opportunities Often Start With Fear

Investors who try to time the market, as well as those who don’t think they are doing so but end up doing it anyway , will often have their buy-and-sell timing turned around. It’s a mathematical fact that investors are more likely to buy high and sell low, which is the opposite of investing for profits.

Share prices go up because more investors want to buy than sell. As share prices rise, more and more investors jump in to buy, and fewer want to sell.

The reverse happens when share prices are falling. As prices decline, more investors want to sell, and fewer want to buy. This often leads to a much deeper drop than the company may warrant.    

Often, investors don’t understand the business or financials behind a stock symbol. The buying and selling frenzies are driven by greed and fear. These emotions lead to buying high and selling low.

To avoid letting fear-based selling rack up losses in your portfolio, you should understand the reason you own each stock in your portfolio. When you first purchase a stock, you can’t know what its short-term price will do. If the broader market goes down, so will the stocks you own. If you have a good reason to own a stock, a lower price is an opportunity to buy more shares for greater profits on the recovery.

An investing strategy focused on dividends from higher-yield securities makes it easier to take advantage of lower share prices. As the share price of an income stock falls, the current yield rises, so buying during the dips grows your income at an even faster rate.

Main Street Capital (MAIN) is a stock that has fallen to a very attractive level for new dollars. In September, MAIN was trading for over $66 per share. At that price, the yield (including regular and supplemental dividends) was 6.5%.

MAIN now trades for about $50, and yields 8.5%. If you owned shares and wanted to sell because the price is down by 24%, you would be locking in your losses. If you add shares at the current lower price, however, you’ll get a big boost to your dividend income and lower your breakeven price when the shares move higher.

MAIN has produced steady total returns. Over the last decade, the share price has been up 60%, and with reinvested dividends, the total return is 240%. Buying shares of a stock like MAIN instead of selling when the price is down will produce wins instead of losses in your portfolio.