"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.

Meanwhile, the owner of the non-dividend paying “growth stock” is more likely to panic and sell at exactly the wrong time. That investor doesn’t know what breaks the fall or where the bottom is. The growth stock’s rise has an unclear end. So too its eventual crash.

Fine, but the stock has dropped 20% or 40% in our example. What do we care about another percentage point or two of yield?

So long as you are not selling, you should still be sleeping like a (good) baby. The dividend is paid each quarter and you reinvest. The lower shares fall, the more your dividend buys—and at a better yield! You own 100 shares of Tom’s. At $10, these shares bring you $50 a year in dividends, which buy 5 shares at 5%. At $8, it buys 6.25 at a 6.25% yield, and at $6, a lovely 8.33 (when reinvesting dividends, you can buy fractional shares) at 8.33%. You buy more and cheaper shares at a higher yield. This reduces your average cost, sets you up for more profits, and increases your average yield while you wait. “What, me worry?” indeed!    

In a roaring bull market, this strategy seems ho hum compared to all the market darlings catapulting ever higher. When investors tire of paying the price to dream, those stocks crash violently. Investors using a value-based dividend reinvestment strategy have shock absorbers and better odds of a brighter future. They don’t need Ambien or NyQuil.