Hey everyone, I often asked myself what I really would do when the market crashes. Of course as a dividend investor there is only one answer buy more share on the dip and averaging down your purchase price to improve your yield on costs. We all know the famous saying “…buy when there is blood on the street”. I also do know that on the long run there is no other alternative than shares. But anyway let’s have a look what a crash could mean to my portfolio and my dividend income.Current Market Situation
Currently the market jumps from one all time high to another one currently the Dow Jones trades at 20 900.98 Points, the S&P at 2 392.24 Points and the DAX at 12 711.06 Points and I think a market correction will come sooner or later, the bull markets takes already more than 8 years. So it is just a matter of time when it will come. By the way I think a market correction is not a bad thing at all as it opens a lot of new investments opportunities.
To keep things easy I will now use the Dow Jones as a benchmark. Let’s have a look to the past, before the financial crisis started the Dow Jones was at 13 930 Points in October 2007 and in February the lowest point of 7 063 Points was reached. That is a decline by more than 49%. For my new scenario I am not assuming such a decline, but I think a correction of around 30% is more than realistic and reasonable. That means the Dow Jones would be at 14 630.69 Points, a level it had about 4 years ago.
What would that Crash mean to my Portfolio?
Currently my portfolio has a value 50 912,13 EUR with a total investment of 47 359.94 EUR. I do have some stocks in there, which gained a lot since I purchased them like Cummins or Altria but I also do have Target in my portfolio which is deeply in red. All in all I am doing fine how things are. My projected yearly dividend income is at 1 352.43 EUR with a current yield of 2.66% and yield on costs of 2.86%.
Again to keep things easy I am assuming my portfolio declines as well by 30% and I am not including any fx-effect. A drop by 30% would mean a decline to a value of 35 638.49 EUR that also means I am at -24.75% with my portfolio performance or in other words I lost more than 11 000 EUR in portfolio value, but luckily I would only loose money if I would sell all my stocks.
What should I do now?
Well first of all you should keep calm most market crashes are emotionally driven, people don’t stop drink Coca Cola because of a market crash and people still buy products of P&G or JNJ etc.. So the fundamentals are most of time not really affected by such a crash and being invested in mostly dividend stocks means the dividend should be safe as well.
What does the crash mean to my dividend yield?
Before the crash my dividend yield was at 2.66% after the crash it is now at 3.80%. Well I think the yield already answers the question what I should do… I have to invest and buy good companies at cheap prices.
If I now would invest 20 000 EUR I could add 760 EUR to my dividend income. That means my total dividend income is now at 2 112.43 EUR with a yield on cost of 3.13% after tax of course and based on a total cost basis of 67 359.94 EUR. As you can see by investing on the dip I could increase my yield on cost from 2.86% to 3.13%.
This example shows quite well how you can take advantage of a market crash, and that the portfolio value is not the most important thing for us dividend income investors. The most important thing is that the dividends are coming in and that the yield on costs goes up by the time.
What should you do in the mean time?
Well even though the market is on a very high level there are still fair valued stocks to find like for example QCOM. As you will never know when the market will crash and as timing the market is impossible you should just keep investing in fairly valued stocks and collect their dividends.
To keep calm during a market crash is always a challenge and even though I have a plan what I should it will be interesting how it will be like as I haven’t had one so far. But yeah let’s see what will happen and to which levels the Dow Jones will further go and how heavy the crash might be. But the important point is to keep calm and to stick to the plan I roughly described above.
What would you do during a crash? Have you already experienced a heavy decline of your portfolio?
I do not recommend any decision to the reader or any user, please consult your own research. Thank you for your understanding.