How to Use a Bear Market to Increase Your Income

I’m sure you’ve read all about how the year has gotten off to the worst start in history. The media love a good bear market because falling stock prices give them something sensational to write about.

But is a bear market really such a bad thing for your income investments?

I know it sounds like crazy talk. No one likes it when their stocks trade lower. But what they may not realize is that when their dividend stocks temporarily lose value, it actually sets up an opportunity for them to grow their income — sometimes by a very large amount.

That’s why I’m excited when the market trades lower. These are the times when levelheaded income investors can dramatically increase the amount of income they receive.

There are two practical ways you can boost your income, thanks to the market’s downturn. But first, let me explain how lower stock prices can lead to more income…

Suppose you’re watching a stock that pays a $0.50 quarterly dividend. The underlying company operates a solid business selling consumer products around the world. This business generates reliable profits in good times and bad because its products are needed by consumers — regardless of whether the economy is growing.

When you started watching the stock, it was trading at $80 per share. Over a full year, investors could expect to receive $2.00 per share in income. (Four quarterly dividend payments of $0.50 add up to $2.00 of income each year.) So based on the stock price of $80, investors were able to collect income of 2.5%. (Income of $2.00 divided by the $80 stock price adds up to a 2.5% yield.)

A yield of 2.5% is certainly attractive. It’s a lot more than you could expect to receive from a savings account at the bank. And it’s a bit more than the 2.4% yield you could get from investing in the S&P 500.

But 2.5% isn’t an exciting amount of income. It just barely keeps up with the pace of inflation.

Now suppose a bear market hits and your stock loses more than a third of its value, trading down to $50 per share.

Nothing has changed with the business. The company still sells products that customers around the world need. Your dividend checks still show up punctually. The only difference is that the stock price is now $50 instead of $80.

If you buy the stock at $50, you’ll still receive $2.00 per share in dividend payments. Only now your yield has moved from 2.5% to 4.0%. That’s a big jump!

The point is as long as your stocks continue to pay you regular dividend checks, it really doesn’t matter what the market says you should pay for them. And if you’re in a position to be able to buy even more shares at a lower price, you can actually purchase more income with your investment money.

So today, instead of panicking about the falling market or checking the value of your account on a day-by-day basis, I want to show you two practical ways to take advantage of the lower stock prices and to increase the amount of income you receive.

One of the best ways to juice your income payments is by participating in a dividend reinvestment plan (DRIP). A DRIP simply takes the income paid to you from your dividend stocks and automatically reinvests the income in new shares of stock.

When you enroll in a DRIP, the size of your position automatically grows over time. And since you own more shares of stock each quarter, your dividend payments get larger and larger. Larger payments means more shares of stock are bought — and the cycle continues…

If you’re enrolled in a DRIP program and the stock price moves lower, your DRIP plan will be able to buy more shares each quarter. This is not something you have to monitor or keep track of each quarter. The shares will automatically be bought in your account, and your next dividend payment will automatically increase.

Today, as stock prices are trading lower, I encourage you to take a look at the stocks in your portfolio. If any of them offer a DRIP program, please take the time to enroll in that program if you haven’t already.

You can find out which of your stocks offer a DRIP program by calling the 800-number listed on your company’s investor relations website. Just Google your company’s name along with the words “investor relations.”

Now let’s look at a second practical way to boost your income…

You may have a 401(k) plan or another retirement plan that you regularly contribute to throughout the year.

These retirement accounts give you an excellent opportunity to regularly invest new capital in dividend stocks. And this way, your income continues to grow as you add more shares.

So if you have a 401(k) or IRA account (or any other brokerage account) that has available cash you don’t need immediately, I encourage you to regularly invest this additional cash into dividend stocks.

If you do this on a monthly basis, you’ll automatically buy more shares when stocks are trading lower. And once again, that means you’ll receive more income for every dollar you spend on buying shares at a discount price.

I hope by now you can see that lower stock prices can help you boost your income over time.

But what about the total value of your account? Should you worry about your stocks trading lower?

Of course, you don’t want to see the value of your account decline for an extended period. But if you’re buying shares of strong companies with solid businesses that are able to grow their dividends, the stock prices won’t stay low forever.

Here’s the thing… In the short run, stock prices trade up and down based on human emotions.

If investors are afraid, they sell shares. And if investors feel euphoric, they buy shares. Selling sends stock prices lower, and buying sends stock prices higher. That’s why we have short-term fluctuations in the market that sometimes don’t really make sense. These short-term fluctuations are based on unpredictable human buy and sell orders.

But in the long run, stock prices eventually line up with the profits our companies generate.

So if you buy shares of well-run companies that pay great dividends and are growing their businesses, your stocks will eventually trade higher and your income will continually increase.

So the next time you read a newspaper article about the Dow dropping 400 points, just realize that this decline likely sets up an opportunity for you to capture more income using these two practical income boosters.

Here’s to growing your income!

Zach Scheidt
for The Daily Reckoning

The Daily Reckoning