A correction is a fairly common event in the stock market and represents a fall of more than 10% from its recent peak. Investors who are savvy and confident of the prospects of the businesses they have invested in can make use of such events to consider increasing their stakes. Income-driven investors would also find excellent opportunities to improve their portfolio’s overall dividend yield by purchasing shares at opportunistic moments.
Using market corrections as a tool
Market corrections should be used as a mechanism for investors to acquire more shares in great companies at cheaper valuations. Market declines are sometimes emotionally-driven, and investors may feel pessimistic for no good reason, which ends up driving share prices down to bargain prices.
Calm and rational investors who have cash on hand are able to scoop up shares on the cheap. Companies that pay a high dividend yield at pre-correction stock prices would offer an even higher dividend yield during a market correction.
Properly assessing the dividend’s sustainability
I should caution, though, that investors should assess if the dividend payment is sustainable in light of changing industry or macro-economic conditions. While market corrections may sometimes be psychology-driven, there may be instances where business conditions cause markets to react as well. Companies that are affected by negative business conditions may choose to reduce or even eliminate their dividend. Therefore, investors should proceed cautiously and be prepared to do some homework.
Space out your purchases
A recommendation would be to space out one’s purchases during a market correction, as no one knows the extent or duration of it. By always keeping some powder dry, investors have the opportunity to take advantage of cheaper valuations to steadily increase their holdings by averaging down.
Having the confidence to act
The most important factor during market corrections is for investors to have the courage, conviction and confidence to act. Investors who fought against their natural fear instinct and purchased REITs during the Great Recession have been rewarded with double-digit dividend yields as the unit prices of such REITs were extremely depressed during that period.
While it is admittedly not easy to conquer one’s emotions, it is a necessary condition in order for an investor to attain a greater margin of safety and to also increase his overall portfolio’s dividend yield. Over time, such actions will reap great rewards as the investor’s passive income stream grows as he is deploying capital more efficiently.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.