During a recent early morning inbox check, I noticed an email subject bearing the question “Will the Stock Market Crash Soon?” With the major market indexes trading at record levels, fears are that the markets are due for a tumble. Plus, market crash headlines make great clickbait…but are they a valid reason to sell your dividend stocks?
All investors (well, except for my newsletter subscribers) want to know when the next market crash will occur. The problem is that the timing is impossible to predict—a crash occurs when those same investors dump their stocks in a falling market, locking in the losses, and that could happen at any time.
I find the current investment universe very interesting and somewhat scary, but with plenty of opportunity for investors who do their homework.
Some parts of the investing world have all the signs of an overheated bubble. Examples include most special purpose acquisition companies (SPACs), bitcoin, anything to do with electric cars, and theme stocks trading at 100s of times revenue. These stocks don’t have P/E ratios because they have no E.
On the other side, much of the stock market remains reasonably valued or undervalued. These are the boring companies with established businesses and actual profits. They pay dividends to investors. Dividend yield is a good metric to show relative valuation. Consider Dividend Aristocrat AT&T (T). For most of the past decade, AT&T was priced to yield 4.5% to 5.5%. When shares got cheap, the yield climbed up over 6%. During the pandemic crash, the yield touched 7.85%.
With a current yield of 6.7%, I view AT&T as an undervalued stock. I am happy to own shares and would buy more in any market downturn, adding shares to lower the average cost and boost the yield. When AT&T again rises to where the yield is less than 5.5%, I will sell to lock in the gains. With no dividend increases, that would be a 27% gain from the current $30.00 share price.
My stock market crash planning has two parts:
- Own shares of high-quality, profitable, dividend-paying companies that I will be happy to buy more at lower prices.
- Focus on growing my dividend income stream, which will be stable and growing even through any market crash.
My experience shows it is tough even to get close to timing stock market downturns. Either investors get out too early, regret the decision, jump back in just before the actual crash, or they wait too long and sell to lock in their losses, afraid to buy shares until again they get expensive.
My Dividend Hunter strategy lets investors stay in the market, always earn an excellent income yield, and comfortably (and profitably) buy more shares when other investors are selling scared.
