Posted on 08/03/2007 8:03:08 AM PDT by BenLurkin
I don't know when we'll see the next bear market. But like you, I know it's coming ... it's not a matter of "if," but rather a matter of "when." And today I'll tell you how you can prepare your portfolio so you'll not only survive the bear, but also be better off than if it had never happened at all.
Siegel says I had the pleasure of hearing one of the world's great investing minds deliver the keynote speech at a Fool investing seminar. Wharton professor Jeremy Siegel is well known for his book Stocks for the Long Run, and his latest -- The Future for Investors -- is another classic. In this book, Siegel lays out the secret for successful investing through all market cycles, and it's in complete agreement with what James Early teaches in the Motley Fool Income Investor newsletter.
It all boils down to the incredible importance of owning dividend-paying stocks and of reinvesting those dividends. It's a concept I wrote about in "The Greatest Investing 'Secret'." Today, I want to expand on this by showing how bear markets can actually help your returns.
Dividend-paying stocks act, in Siegel's words, as "bear-market protectors" and "return accelerators" during down markets:
Dividend yield is a huge factor when it comes to actual returns. The yield is simply the dividend per share, divided by the price. So a $100 stock that pays $2 in yearly dividends has a yield of 2%. When stock prices fall, yields obviously increase as long as companies don't cut their dividends at a greater rate than the price drop. When those dividends are reinvested, they purchase more and more shares at lower prices during a bear market. These extra shares act as a bear-market protector. Then, when share prices reverse, the extra shares act as a return accelerator and rocket total returns higher. Beating the Depression The greatest example of how this works involves the stock market crash of 1929 and the Great Depression that followed soon after. On Sept. 3, 1929, the Dow Jones Industrial Average hit 381 -- and it did not reach that level again until November 1954. That's an incredible rough patch that pained investors for a full 25 years.
As I pointed out in my previous article, Siegel explained the surprising truth that the average stockholder who reinvested dividends actually showed a positive return of more than 6% per year during that 25-year period, easily beating the performance of bonds and short-term treasuries. Think about that the next time you hear someone say it took 25 years for stock investors to break even during that period. That's true only for those who didn't reinvest their dividends!
Siegel has additional (and surprising) revelations:
If the Great Depression had never occurred, and if dividends had made a smooth ascent while stock prices remained stable, things would have been far worse for long-term stock investors. That's because $1,000 invested at the beginning of this fictional, stable period would have turned into only $2,720 by November 1954. That's 60% less than what dividend reinvestors actually accumulated in real life. A dividend-paying stock that falls will recover its total value even if the price never recovers, and that's because of the extra shares purchased (bear market protector). In fact, the greater the fall, the fewer the number of years it takes to reach breakeven status. And, of course, if the price recovers, the gains are magnified because of the extra shares (return accelerator). Thus you can see that periodic bear markets are actually very beneficial to long-term dividend reinvestors. Siegel illustrated this reality with a case study of Philip Morris (now Altria). Because of bad publicity and lawsuits, the cigarette maker's price was the same in March 2003 as it was 12 years before. Yet those who reinvested their dividends earned an average of 7.1% per year throughout that period. Then, when the stock price recovered, reinvestors had twice the number of shares they had 12 years before.
Good for bulls, too Finally, to convince you that owning strong dividend-paying companies is a no-brainer, these stocks perform well across all market cycles. Consider that the 20 best-performing survivor stocks from the original S&P 500 in 1957 are all dividend payers. But even beyond those 20, most of the top-performing original S&Pers are dividend payers. Here is a small sampling of these "corporate El Dorados," as Siegel calls them, and their returns during his 1957-to-2003 study period (dividends reinvested, of course):
Company (2003 Name) Current Yield Annual Return $1,000 Invested
McGraw-Hill (NYSE: MHP) 1.4% 13.56% $347,000
CVS (NYSE: CVS) 0.7% 13.46% $333,000
Cooper Industries (NYSE: CBE) 1.6% 13.35% $319,000
Schlumberger (NYSE: SLB) 0.7% 13.02% $279,000
Equitable Resources (NYSE: EQT) 1.9% 12.88% $263,000
Deere (NYSE: DE) 1.5% 12.76% $251,000
Pitney Bowes (NYSE: PBI) 2.9% 12.68% $243,000
S&P 500 1.8% 10.85% $114,250
Source: Jeremy Siegel, The Future for Investors.
Beating the bear Siegel sums it up nicely: "Bear markets are not only painful episodes that investors must endure; they are also an integral reason why investors who reinvest dividends experience sharply higher returns."
This is the essence of what James searches for every day in Income Investor -- stable dividend payers designed to weather any market cycle. If you'd like to try out the service and get the full list of his market-beating recommendations, you can do so free for 30 days. There's no obligation to subscribe.
Nine grizzlies have been killed so far this summer near town. Right now several delinquent grizzlies are rampaging about ten miles outside of town. How to deal with this bear market?
Yes...but you’re not going to get any ten-baggers buying dividend-paying stocks. Might as well just buy S&P 500 Index funds, if you are attracted to this strategy. It works...but slowly.
I dunno. It’s out of my control.
But one thing about this article — at least the guy isn’t hitting the panic button and dumping his stocks.
I guess the idea though is that a careful investor can pick stocks which will outperform the index over time. Whether one can or not there often seems to be the allure that makes one think they can.
Try to bribe them with gold.
WRONG!!! Bribe’em with Chinese imported food and toothpaste.
And if pigs could fly...
It appears you did not read that paragraph very closely.
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