The market has recovered quickly from the sharp drop that began in January. It looks we like we have avoided a full-blown recession again, even after a bunch of those dumb “doomsday” scenario articles surfaced. Remember, those articles come out every week of the year and are best to just be completely ignored.
I continued shoveling all the money I saved into the market over the course of the last 2 months and its been exciting watching everything return (almost) to their previous value.
With that, here’s a quick list of what I learned during a pullback:
Focus on Fundamentals and History. Are your dividends able to withstand recessions? Did they make it through the last recession unscathed, and hopefully increasing their dividend? I have experienced only 1 major dividend cut (KMI) in the last 2 years, and I’d like to think it’s because I’m buying the safer companies. Focus on payout ratios for Q4 of 2015 and Q1 of 2016 (when results come). Indirectly, this means that you look at earnings (EPS). Is the business still pulling in the same money it was?
Dividend Yields Increase! Just by definition, when a stock price drops, the yield increases. A lot of dividend investors set a limit on their minimum yield. Mine is usually around 2.5%, but I occasionally open it up to lower yields that have a small payout ratio that have announced 10+% increases in recent years. So let’s say you’re threshold is 2.5%, and you’ve previously ruled out any stocks paying less.
EXAMPLE: Stock ABC is priced at $100 with a 2.25% yield. ABC goes down 10% with the rest of the market and winds up at $90. That same 2.25% turns into a 2.5% yield, thus putting it on your buy radar.
I find this to be interesting, because it opens up your possible stock list to some strong companies that you’ve never considered/analyzed before.
Oil companies walk a thin line. A lot of oil companies have had to cut their dividends in the last few months. KMI, COP, BBL all made significant cuts recently, which are hard to swallow for dividend investors. I recently cut back my position in CVX due to an increased concern over the dividend (who knows if I’ll be correct, but I took away stress by doing so). A lot of these companies were churning out profits like crazy and upped their dividend payout way too much, not compensating for a potential drop in oil. Queue the drop in oil and they are all struggling to pay out what is expected from them. It’s important to focus on the fundamentals with oil. I went back to the basics and re-allocated some money in energy companies that aren’t over-leveraged with regards to their dividend. A couple energy companies I bought into recently are below. I won’t go into a full description of them, but highlight a few key points:
Valero Energy (VLO) – they have been beaten down like the rest, but maintain a high EPS number of 7.91. Their dividend is a nice 4+% yield (i bought when it was 4.4%) and the payout ratio is only 30% over the course of the last year. It jumped up to 80% recently, but that is still under 100%, unlike a lot of other oil companies. They have also been increasing their dividend at a huge rate, increasing from 20 cents per share in 2013 to now 60 cents per share in 2016.
Tesero Energy (TSO) – they feature a huge 12.36 EPS to go along with a 2.5% yield at a 16% payout ratio over the course of the year. They jumped up to over 100% in the last quarter, but I’m not concerned as previous quarters were both under 10% during a falling oil period. Like VLO, they have increased their dividend from 20 cents in 2013 to 50 cents in the most recent quarter.
Marathon Petroleum (MPC) – I bought Marathon for similar reason to the first two. High EPS (6.34) and low payout ratio (20% over the last year). Dividend has increased from 18 cents in 2013 to its current standing at 32 cents per share for a nice 3.75% yield.
Give me the companies that can still churn out earnings with oil at these prices. After all, oil is no guarantee to return to previous norms. It could, which is why I have opened several positions in the sector, but no one really talks about the possibility that it will never return to the $60 range. The payout ratios for these companies look much better than Exxon’s 76%, and Chevron’s 174% over the last year. Not saying that those companies won’t recover, but we truly don’t know what the future of oil prices entails. I’d rather not walk the thin line with them (I still have a smaller position in CVX).
People always panic. Don’t be one of them. We know that many people sold off at a 10-15% loss over the course of the last 2 months. We are playing the long game and can’t afford to “cut our losses”. Anyone who sold anything for a loss over the last few months probably doesn’t feel good about it after this week of gains.
Ignore it all if you have to. Ignore the news, portfolio updates, etc. If it stresses you out, don’t look at it. Just keep telling yourself you are in it for the long haul and a month, or two months, or a year isn’t going to affect your plan.
A recession could happen tomorrow. We just never know when they will come. And if it does come tomorrow, I’ll be buying on the way down.
Thank you for reading. Hope everyone has a great weekend!