E Market Jitters? Here's How To Sleep At Night

"What, Me Worry?"
       --Mad Magazine's Alfred E. Neuman

Oh, how I love the smell of a down market in the morning! And it’s been an olfactory delight this month, especially Friday and Monday. Notice I’m not upset and neither should you be. When you own value-priced dividend-paying stocks, and you reinvest the dividends, declining prices are your protector and friend. You sleep at night while others shake. You are Alfred E. Neuman, but with better teeth and smaller ears.

First, if you’ve even skimmed my columns (What, you haven’t? For shame!), you know that no matter what stocks or mutual funds you buy or when, there will be blood. If you can’t take it, don’t own stocks.  It’s how markets work: emotional ups, emotional downs, and the downs are nasty, brutish, and quick. If you pay value prices for a decent—not even great—business with a safe dividend yield, there is a likely floor to how much your stock can drop. Plus, you get paid to wait for emotions to subside and the market to value your stock correctly again. You don’t panic, because you have both shock absorbers and a potential source of future gains. Zzzzzzzzzzzz.

Assume you own—but do not throw—Tom’s Tomatoes, a steady but unspectacular (duh, it’s got “Tom” in it) tomato grower. You paid an average of $10 a share. Tom’s spits out $0.50 year after year in dividends, so at your purchase price Tom’s yields 5%.

As always happens, someday the markets turn bearish. The stock crumbles to $8, but the yield bumps to 6.25%. If investors truly panic, all stocks go with it and the price might collapse to $6, but this boosts the yield to 8.33%. In today’s low inflation environment, these are very, very good yields. Potential buyers lick their lips. Eventually--Wow, 8.33%? How often do you get that without teeth-grinding risk?—many buy to lock down the juicy yield. With more buyers than sellers, the stock rises. Voilà, shock absorber and a source of potential profits.

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Tom Jacobs is an Investment Advisor for separately managed accounts with Dallas’s Echelon Investment Management. You may reach him at more

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Marcy Brown 6 years ago Member's comment

As always, a good read, but I really wish you would give some concrete examples.

Tom Jacobs 6 years ago Author's comment

Thank you Marcy! My firm will let me use large well-known companies as examples and I will do so from here forward. Please excuse this oversight. As a former teacher, I know the value of real-life examples.