I’m trying to find some free time in my day to put out a couple of quick posts on some of the opportunities that have become available in today’s significant market sell-off (that is a continuation of a selloff that began last Monday).
As someone who has been writing investment articles publicly since 2011, I haven’t been around long enough to write during a deep recession. But I have not been prevented from developing the right mindset that someone should maintain when a stock market correction does arrive.
And the key, I think, is to focus on the underlying business and to keep a majority of one’s stock market net worth in the highest caliber companies that keep paying dividends and maintaining billion-dollar profits even when the price of the stock is falling fast. It’s easy to be cavalier about Coca-Cola stock falling $5 per share when you understand the $10 billion per year profits that the share of the stock represents.
Even though small-caps tend to create the most net wealth for an investor, I think it is the presence of creating a portfolio filled with the absolute best companies in the world that permits someone to make peace with the extra volatility in the small-capitalization space in the pursuit of greater returns.
There are quite a few companies that have hit my radar in response to this morning’s market selloff, and I intend on writing about a few of them if I get the chance, but two things have immediately caught my attention.
The first was the Visa fall to $60, as I saw that offering the best risk-adjusted total return potential for people that seek growth from high-quality companies. The second is the sustained collapse in the price of Royal Dutch Shell, which has fallen below the $50 mark today.
Even though Royal Dutch Shell is a slow grower, it tends to offer investors gobs and gobs of income that can be used to fund other investments or to improve your own lifestyle. It was created in the 1910s as a countermeasure to the rise of Rockefeller’s Standard Oil empire, and has delivered 14% annual returns from 1914 through 2006 according to the company’s corporate biography. There have been dividend cuts, extreme fluctuations in stock price, and a whole lot of turmoil in specific years.
But for the investors that have stuck with Royal Dutch Shell, the results have been exceptionally sweet because beating the stocks that make up the general stock market has always delivered large amounts of annual income that make the gains in net worth feel real–you actually get a check every 90 days that act as a manifestation of the impressive long-term total returns that you have experienced.
It is only during the crashes that you get a chance to buy companies like Royal Dutch Shell in the 6% to 9% yield range. With today’s selloff, the stock dipped under $50 per share and has given investors a chance to earn 7.5% in dividend income immediately from the investment.
With oil trading at the lowest price in seven years, investors have a chance to secure $750 in annual income from a $10,000 initial investment in Royal Dutch Shell. Frequently, investors in the beginning stage of building a portfolio express a desire to make $1,000 investments at a time. For someone that buys $13,500 of Shell, you’d be creating your own self-funding mechanism that would provide you $1,000 in capital to make new investments.
The reason why the stock has gotten so cheap is that the current annual profits barely support the current dividend payment. If stayed in the $30s or $40s for the next few years, there would likely be a dividend cut at some point in time. Shell indicated that it intends to keep the $0.94 quarterly dividend payment steady throughout next year, and then will reassess the dividend after that based on market conditions.
Even in a scenario in which the dividend was cut in half, you would still be collecting almost 4% from your investment, and you would stand to eventually receive greater dividend growth down the road as share prices recover. Or, if the dividend doesn’t get cut, you’re likely to see a frozen dividend or negligible dividend growth going forward. The mechanism of getting money to shareholders has a couple of different possible routes over the next five years, but the underlying thesis that Royal Dutch Shell shareholders will receive large chunks of income over the long haul remains intact.
It is when times are uncertain, profits dip, and dividends get frozen or cut that investors get a chance to buy assets on the cheap and set themselves up for significant capital gains and impressive yield-on-cost figures five or ten years down the road. Buying Royal Dutch Shell, and patiently collecting the dividend income amidst all the fluctuations, is how you engage in value investing with a dividend focus.
Donald Yacktman was fond of saying that bull markets make everyone feel good, but bear markets are where you make the “real money.” The energy sector has been beaten far more than the rest of the general economy over the past year. This current stock market decline has brought some great companies from “moderately overvalued” to “fairly valued” territory. There is nothing wrong with that–an opportunity to buy the absolute best companies in the world at a fair price is nothing to scorn.
But there is also a segment of the investor class that loves getting deals. Fair value is not enough–the emotional high comes from getting something on sale, and then experiencing the added rewards when the sale price eventually becomes a premium price in the market as conditions improve and investor sentiment shifts positive.
To find the sales in the stock market, you probably need to be looking to the energy sector. Royal Dutch Shell is one such example. The amount of cash that long-term shareholders stand to receive is becoming quite large when compared to the initial investment amount. When you do some digging on the history of Shell’s dividend, there haven’t been many opportunities to lock in a dividend yield greater than 7%.It’s always accompanied by some type of crash in the commodities market, and the decline of oil to the $30 range is providing an opportunity for investors that can handle wild fluctuations in stock price and potentially short-term dividend income in the pursuit of receiving lots of total income and significant capital gains over the long haul.