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The Market is Going to Crash - A Dividend Investor's Guide to 3 Stocks You Can Buy Blindfolded

April 21, 2014 | About:

The market is going to crash.

Well sooner or later.

But what happens in a market crash? Are you prepared?

The answer to this simple but important question depends on who you are asking.

The Different Mentality of 3 Types of Investors

For a Short Term Trader long on the markets, the answer is something like “I’m about to be wiped out”.

(FYI if you want to become super wealthy by trading, remember the number of day traders on the Forbes Richest List is…zero)

For a Medium Term Investor (investment horizon of 5 to 6 years), the answer will shift focus to the severity of a market crash instead of focusing on a binary event. After all, a 20% correction is small when you put it into perspective of a 5 year timeframe. That’s because markets can easily move +/- 20-30% in any given 5-6 year timeframe.

You can see exactly what I mean by reading Active Value Investing by Vitaliy Katsenelson.

But if the correction is 2008-2009 recession like, resulting in 50-60% drops, you’ll be underwater for many years before breaking even. And it’s going to be a painful process because a 50% drop means a 100% appreciation is required just to get back to your starting point.

The Best Time To Buy - When There Is Blood On Street

The Best Time To Buy – When There Is Blood On the Streets

I am Long Term Investor.

That’s right.

A boring, non-glamorous & “lazy” person who invests for decades & not just years.

Because of such long investment time horizons, I prefer to stick with proven businesses paying good dividends; an approach perfected by the likes of Warren Buffett & someone even wealthier than Buffett.

A long term investor’s focus on dividend stocks is very different to short-term and mid term market participants.

I’m laughing when others cry.

I cry when others laugh.

Be fearful when others are greedy and be greedy when others are fearful.

But before giving out the names of 3 stocks you can buy blindfolded in the next market crash, let’s see how a long term dividend investor views a market crash.

How Dividend Investors Beat the Market

What is it about dividend stocks and long term investing that is ridiculed by shorter term investors?

For starters, I get that dividend stocks are considered as defensive stocks.

These are stocks that don’t move up or down a lot. When markets head south and everyone else is panicking about the decline in their portfolio, dividend investors see the market crash as an incredible opportunity to buy quality stocks at distressed valuations.

Mr Market is having a garage sale where he is selling quality stuff along with the junk. The beauty of this ideas is that, quality dividend stocks gives you direct access to the growing cash the company is able to generate.

Let me show you the power of dividends.

It took the market more than 25 years (from 1929 to 1954) to get back to the levels achieved before the 1929 crash.

Now if you include dividends into the picture, the story is different.

In the same 25 year period, a dividend investor would have converted a $1,000 portfolio into $4,310.

An absolute return of 331% or compound annual growth of 6.02% compared to 0% without any dividends.

Power of Reinvesting Dividends

If you follow the dividend strategy and people laugh at your for holding boring stocks, you’ll the one laughing many decades later. Manage dividend stocks in a tax free account, and you’ll be laughing so hard your stomach hurts.

Boring is beautiful but people are deprived of proper data and perspective. If practiced well, dividend investing is an effective strategy for bear markets.

Easy-To-Use Rules of Thumb to Predict the On Coming Market Crash

But with the market giddy at all time highs, the question is how to determine whether the market will crash soon.

A stock market bubble is harder to spot than you think but market bubbles repeat.

But here are some market crash indicator tips.

Tip #1: People who’ve never shown interest in the markets just want to talk about the stock market.

Examples: moms, your mom’s circle of friends, your wife, your wife’s circle of friends.

The common theme is that these people think it’s so easy to make money in the stock market because they see images like this.

Stock Market Couple

Retirement is So Easy Thanks to the Stock Market

Tip #2: TV business channels or business newspapers proclaim a target for the Dow Jones or S&P500.

These predictions are made by people in the brokering business and make money when people buy stocks. Conflict of interest here.

Dow 16,000!

Tip #3: There is euphoria and a general a sense of over-optimism. Mind you, this euphoria is not backed by adequate growth in underlying earnings or business growth.

The Market Can Do No Wrong

For mathematical indicators, gurufocus has a page dedicated to the stock market valuation.

Stock Market Valuation

Stock Market Valuation

But…

Are You Ready For The Coming Market Crash??

What good is an opportunity in hindsight?

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You need to have the cash to take advantage of the opportunity.

Cash combined with courage in a crisis is priceless. – Warren Buffett (Trades, Portfolio)

3 Stocks To Buy Like a Madman in the Coming Market Crash

Starting with as little as three quality dividend stocks is a powerful strategy for long term wealth creation.

As you’ve seen in the numbers, dividends provide income in down and sideways markets. Reinvest those dividends and watch it compound over time.

Here are three solid and proven businesses that I’ll be honored to hold large amounts of in a dividend-focused portfolio.

Dividend Star #1: Johnson & Johnson (JNJ)

I like JNJ because it’s a recession proof business.

Follow along with the Stock Analysis Software by Old School Value as it’s easy to see fundamental numbers and will give you a better idea behind the numbers.

Looking at the data, it’s easy to see the stability of revenues. Even during tough periods, revenues only dipped 2.9% in 2009. Click the image below to see the full size with the notes.

JNJ Revenue Stability | Click to Enlarge

Dan Myers also wrote how you can tell whether a company has a moat based on consistency of gross margins.

Let’s take a look.

JNJ Gross Margin Consistency

With such a diverse base of products and customers, JNJ reduces dependencies on any one particular type of product or customer. A 3% drop over 10 years is remarkably strong because in a capital market where margins are strong, you are bound to see competition come up and try to take some of the pie.

I have no hesitation in recommending JNJ in any sort of market crash.

JNJ has continuously increased its dividends for the last 10 years, regardless of how terrible the market is.

The table below shows how consistently JNJ has returned cash to shareholders.

Year

Dividends per share

2004

1.08

2005

1.27

2006

1.46

2007

1.62

2008

1.80

2009

1.93

2010

2.11

2011

2.25

2012

2.40

2013

2.59

After achieving a peak of almost $72, the stock fell to $47 in the abyss of 2009.

That was a correction of almost 35%.

If you bought it, the yield-on-cost would have been a fantastic 5.5% compared to the current yield of 2.68%. But knowing JNJ, even the current yield should get better with increasing dividends in the future.

Dividend Star #2: Procter & Gamble (PG)

Fundamentally, Procter & Gamble runs a similar business model to JNJ, except in the consumer goods industry.

Here are some fundamental numbers using the OSV tools again to get you started. Again, click to see the full image.

PG Revenues, Yearly Changes and Margins | Click to Enlarge

PG Gross Margins are Strong

Here are the dividend numbers over the past 10 years.

Year

Dividends per share

2004

0.93

2005

1.03

2006

1.15

2007

1.28

2008

1.45

2009

1.64

2010

1.80

2011

1.97

2012

2.14

2013

2.29

Buying during 2009 at a price of $45 would have provided a yield on cost of 5.20% compared to the current yield of 3.15%. With stable, predictable cash flows and operational profits, its highly unlikely PG will reduce its dividend payouts in the foreseeable future.

Dividend Star #3: The Coca-Cola Company (KO)

Warren Buffett (Trades, Portfolio) loves this company and treats it as one of his best investments.

Rightfully so.

He has earned billions of dollars off the company with a lot coming from the dividends.

You and I are not Warren Buffett, but we can still benefit from Coca Cola’s dividend policy.

Coca Cola’s stock peaked at the start of 2008 at $32 before falling to $20. A sale of almost 38%. Buying then would have provided a yield on cost of 5.7%. Much higher than the curren t 3.1%.

Year Dividend % Increase
2004 0.50 -
2005 0.56 12%
2006 0.62 11%
2006 0.68 10%
2007 0.76 12%
2008 0.82 8%
2009 0.88 7%
2010 0.94 7%
2011 1.02 9%
2012 1.12 10%

2024 Yield-on-Cost Scenarios

The past trend shows that JNJ, PG and KO have been increasing their dividends by approx 10% each year.

Suppose you bought at the rock bottom sale prices in 2009 and held on until 2024.

Assuming that the dividend continues to increase at an average pace of 10% for the next 10 years, here’s what you would get.

Dividend Yield On Cost

These 3 boring businesses are offering yields close to 16% every year.

Wow.

Which investment instrument can offer such returns? Certainly not your bank savings or anything else that can withstand recessions and still grow at such a rate.

So what are you waiting for?

Start hoarding cash in your “Market Crash Fund” for the next market crash.

I’m not an oracle, but I do know that a crash will come sooner or later.

About the author:

Jae Jun
Founder of Old School Value (http://www.oldschoolvalue.com) dedicated to offering the most complete and detailed stock valuation and analysis spreadsheet. Investing made easy by importing 10 years of financials and 5 quarterly statements directly to excel for your analysis needs. Save time, make smarter decisions and make more money.

Visit Jae Jun's Website


Rating: 3.1/5 (8 votes)

Voters:

Comments

moneycone
Moneycone - 7 months ago

But also remember Munger's wise words: No matter how wonderful a business is it's not worth an infinite price.

None of the three companies look cheap or even fairly priced.

pravchaw
Pravchaw premium member - 7 months ago

I recommend people read the excellent blog

http://philosophicaleconomics.wordpress.com/2014/03/21/pmepi/

to think whether the market is over-valued or fairly valued.

There is a lot of things we could have done in 2009 but that is hindsight - what is the recommendation now? Should we cash out and wait for the next crash?

batbeer2
Batbeer2 premium member - 7 months ago

>> But also remember Munger's wise words: No matter how wonderful a business is it's not worth an infinite price.

Munger also says KO will be worth roughly triillion in 20 years.

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