Corrections are normal. What’s not been normal over the last 10 years is how few corrections of 10% or better we’ve had.
Fear knocked on the door. Faith answered. No one was there. -English proverb
Imagine you bought a stock back in 2009 at $7 a share. It had dropped from a high of $15 in 2007. But, the 22 cent dividend gave you a 3.1% yield and the prospects of the price staying so low for long were historically improbable.
The trade worked well. By 2011 your $7 stock had recovered to $12 and the dividend had increased by 18% to just over 26 cents per share. In 2013 it was at $17 surpassing the previous $15 high. By 2015 it was trading between $19 and $21, with a dividend of over 43 cents a share, almost double the amount from where you bought in back in 2009. And, earlier this year it ran to a high of $29 ½. Recently it has backed off to $26 ½. Would you consider it time to sell?
Consider the following: from a valuation standpoint, it sells at 15x next year’s earnings – not that expensive in a 3%, 10-year Treasury world. The cash on cash dividend off your original $7 purchase point is now 7.5%. That would be lost if you sold. Granted, the yield at the current $26 ½ price is just 2%, but your dividend has been compounding at about 9% per annum for the past 10 years. The dividend is expected to continue to grow. And, if you sell now, the after tax proceeds to reinvest would only be about $21 per share* if you sold it in a taxable account.
Of course with the market shaky at the moment, and possibly going lower, you’ll be able to buy your gem of a stock back below $21, right, even though that’s 20% below where it trades at the moment? You’ve always been a great market timer, right? On the other hand, and thinking long-term, over the next year or so there may be a time to add to this great investment at slightly lower prices than $26 1/2.
This anecdote describes the movement of the S&P 500 over the last decade if it were a stock. Serious, long-term investors would no sooner sell this kind of investment—one that has tripled in price—because of a 10% correction, than they would decide to trade bitcoin or dabble in penny stocks.
The message of this story: don’t panic and cave on this market. Corrections are normal. What’s not been normal over the last 10 years is how few corrections of 10% or better we’ve had.
In all likelihood your $26 ½ stock will not triple again in the next ten years. But, the dividends will continue to grow and the appreciation potential will almost certainly beat the 3%, before taxes and inflation, that you can earn on so called “safe” money.
*Assumes a 30% combined top marginal capital gain inclusive of federal capital gains tax, net investment income tax and state capital gain tax.
This note by the President of Janney’s Private Client Group was published on November 21st, 2018.
Janney Montgomery Scott LLC Financial Advisors are available to discuss all considerations and risks involved with various products and strategies presented. We will be happy to provide a prospectus, when available, and other information upon request. Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
Janney Montgomery Scott LLC is a member of the New York Stock Exchange, Financial Industry Regulatory Authority and the Securities Investor Protection Corporation.
For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.