“Fortunes are going to be made out of this time.”
That quote belongs to Suze Orman in an interview she did with CNBC in late March 2020 after the stock market had dropped 30% in two weeks. And she was right. If you bought the dip, the resulting bounce-back produced some of the fastest profits you will ever see in the stock market. While many companies have bounced back all the way to their pre-coronavirus drop, many others are still languishing well-below their recent highs.
The old adage of “buy low, sell high” is a simplistic way to look at the market, but that doesn’t make it any less true. Knowing when to buy and when to sell, though, can often be much easier said than done. Those looking to day-trade and make quick profits must be digesting every little piece of information in regards to a company to have an understanding of when to buy and sell.
Value investing, however, provides investors with an efficient way of making long-term profits. The idea behind value investing is to not only buy low, but to select reliable, established businesses that are trading below their fair value.
One of the original proponents of value investing was Joel Greenblatt. He compares value investing to inspecting a house you are looking to buy. You would examine the foundation of the house, the quality of construction, how much rental yields would be, possible improvements, and compare prices in the neighborhood. When you are house hunting, you’d like to be looking to buy while in a buyer’s market. No one wants to buy a house once the housing market has reached record highs, especially if the house needs any potential improvement.
The Problem with Value Investing
The problem with value investing is that ever since the financial crisis of 2008, the stock market has soared and never looked back. If you were trying to practice value investing, you likely would not have been in on stocks such as Amazon that continue to reach new record highs year over year. And if you did not get in on the recent stock rally in 2020, which was spurred on by multiple stimulus rounds, you may again be in a position where the top-performing stocks appear to be priced too high to show value.
When investigating a stock, you will see standard numbers such as a 52-week high, a 52-week low, the daily high and low, price to earnings ratio, market cap, and dividend yield. Companies that have recently entered a stock exchange do not offer dividends because they are young, growing companies that are still trying to turn a profit. Examples of these companies would include Uber, Lyft, and Peloton.
Mature companies, though, offer dividends to their investors, which means that for every share you own of a company, you receive a percentage of the company’s stock price at the time of the payout. Most companies pay out dividends once a quarter, but some payout bi-annually and others annually. The dividend yield is the percentage of the stock that is paid out to investors.
How to Calculate Dividend Yield
The dividend yield equals the annual dividend payouts divided by the stock price. Here is an example:
- Buy a stock for $50 a share
- The stock pays out a dividend of $0.50 per share each quarter, so for every share you own, you receive $2 per year
- Divide $2 by $50, which equals 0.04
- Your stock has a dividend yield of 4%
What Is a Good Dividend Yield?
A payout of between 4%-6% can be considered a good dividend yield when looking at proven companies with a history of profitability. Dividend yields can reach much higher, but if the yield is over 10%, you should look at the company with a more critical eye.
Don’t Be Tricked by Dividend Yields
A high dividend does not always equal a strong buying opportunity. While a high yield is attractive, your payout with each dividend is dependent on the share price at the time. If that share price has not shown a history of trending upwards, your money will be better invested in another company.
Combine Dividend Investing with Value Investing
Value investing is most efficient when you are targeting strong, established companies that are going through a rough patch and are trading below what you believe to be fair market value. Established companies are better prepared to bounce back from a downward trend than younger companies. They have capital, a good reputation, goodwill from customers, and likely have a history of proving their ability to bounce back from bad times.
Not every established company will hand out a large dividend yield. For example, Apple (AAPL) currently has a dividend yield of just 0.87%. Amazon (AMZN) doesn’t even bother handing out a dividend. These top-performing stocks know that they will get plenty of interested investors despite not having an appealing dividend. In the next tier of companies, though, you can find established businesses that offer attractive yields.
Verizon (VZ) offers a yield of 4.54% and has shown to be a reliable company with a positive trending stock price that has always bounced back from any diversity. Delta Airlines is another established and successful company offering a quality yield of 5.70%. It takes some guts to invest in airlines at the moment, but as Warren Buffet famously said, “It is wise to be fearful when others are greedy and greedy when others are fearful.”
It is fair to say that many are fearful of investing in an airline company during a pandemic, but that is exactly what provides the buying opportunity. Ironically, Warren Buffett recently sold his company’s entire stake in all airline stock. The investment mogul had an estimated $7-$8 billion invested in airlines.
Bottom Line on Smart Investing Amid Coronavirus
Being a successful investor is all about one thing: value. Another Warren Buffett quote goes like this, “Price is what you pay. Value is what you get.” There is no question that the coronavirus has produced countless value stocks that you should consider investing in.
The biggest thing to remember when investing during these unique times is that it’s going to be anything but a smooth ride. There will be bumps along the way, and no one would be surprised if there was another sudden 30% drop if a second wave of the virus hits hard. Making a quick profit is certainly possible, but not advisable right now. If you invest for the long run, though, your portfolio could be fun to look at four years from now.