Stock Market Breakdown: How a Correction
Would Be a Buying Opportunity
I’d like to see a stock market correction so income investors could buy good dividend paying stocks at fair prices. I’m not rooting for disaster, of course, and I’m not fond of short selling. I just think that, if the stock market pulled back a normal three percent to five percent from its current level, it would make for a very good entry point for new positions.
Although the stock market has done very well since the beginning of the year, dividend yields have stayed about the same. This is due to dividends increases and, as expected, the news for income investors has been good and widespread among a number of industries. Corporations would still prefer to return excess cash in the form of dividends or share buybacks than invest in new plant, equipment and employees. It’s an easy strategy in an uncertain world and, at the end of the day, it keeps shareholders happy.
I expect more increased dividends announcements in the second quarter this year. I knew we were going to get lots of this in the first quarter (see Expect Big Increases to Dividends Over The Next Few Quarters), but when the second quarter ends, company managements have a good sense as to how the rest of the year is going to go. Increased dividends announcements during the first quarter resulted in solid institutional buying. Dividends news was actually an event-driven trade, which is quite remarkable. It would seem that, in the age of austerity, dividends paying blue-chips are once again all the rage. It’s pretty clear to me that, as a group, higher dividends paying large-cap companies will continue to be stock market leaders going into 2013.
The stock market is slowly breaking down at this time, but this isn’t really a worry. We just came off a very good first-quarter earnings season with decent visibility for the rest of the year. The best thing the stock market has going for itself now is its reasonable valuation. Fairly priced stocks can withstand a good degree of bad news. I’m not expecting any major surprises in upcoming economic news, but I do expect the second quarter to be slower than the first. We can already see this in retail spending data.
If a meaningful stock market correction were to occur, then it would be an attractive buying opportunity for new positions. Giving the uncertainty in the world, you really can’t expect much going into 2013. From my perspective, if the stock market were to finish the year where it’s at right now, then it would be a decent year for equity investors. I think this is a market where investors should focus on the leaders—those large-cap companies that have done well this year and pay higher rates of dividends to shareholders. Right now, a blue-chip company’s dividends payment is really the only reliable source of income an investor can find.