{"id":7342,"date":"2022-05-31T19:55:05","date_gmt":"2022-05-31T19:55:05","guid":{"rendered":"https:\/\/ifg.local\/articles\/dividend-investing-during-a-market-crash\/"},"modified":"2023-09-21T10:04:03","modified_gmt":"2023-09-21T10:04:03","slug":"dividend-investing-during-a-market-crash","status":"publish","type":"post","link":"https:\/\/www.islamicfinanceguru.com\/articles\/dividend-investing-during-a-market-crash","title":{"rendered":"Understanding Dividend Investment During Market Crash | IFG"},"content":{"rendered":"
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In a previous recent<\/a> article, I mentioned that the current market crash is a good time to get started on investing in the stock market as long as you have a long-term outlook.<\/p>\n

In this article, we\u2019ll discuss dividend investing. And how market crashes can be a unique opportunity <\/strong>to get amazing dividends for years to come. Please note that this article is NOT financial advice, nor is it a recommendation. If in doubt, please seek help from a financial adviser.<\/p>\n

We\u2019ll be sharing some stocks that I\u2019ll be researching in the coming week. We recently shared that we liked Shell \u2013 that was not only giving a 14% yield at the prices it was then, but has also since increased in price by around 40%.<\/p>\n

What are dividends?<\/h2>\n

Dividends are payments made to shareholders out of profits.<\/p>\n

Let\u2019s say XYZ plc, in which you invested in 2 years ago, made \u00a330m in profits this year. Their board would get together and decide what to do with that money. They would have a few basic options:<\/p>\n

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  1. Keep the cash in the bank for an uncertain future event or project;<\/li>\n
  2. Reinvest the money back into the business with the idea that investing \u00a330m back into the business today (by opening a new factory, for example) would add more back to the company in profits;<\/li>\n
  3. It can distribute this cash out to shareholders; or<\/li>\n
  4. It can do a mixture of these things, by distributing a certain amount to shareholders and keeping some in the bank.<\/li>\n<\/ol>\n

    Option (4) is what nearly all companies who pay dividends do. Some even have a target % that they try to return to shareholders via dividends.<\/p>\n

    What dividends mean for you?<\/h2>\n

    They mean passive income<\/strong>.<\/p>\n

    Dividends are the most passive of income sources I know. You buy shares (usually online and super simple) and you literally do nothing. The money drops into your online share account.<\/p>\n

    Like any form of income from investment, you should be looking at your yield<\/strong>. That means the return on your investment<\/strong> and it\u2019s usually expressed as an annual percentage<\/strong>.<\/p>\n

    For example, if I buy shares in XYZ plc for \u00a310, and I get 50p back as a dividend, that would be a solid 5% yield<\/strong>.<\/p>\n

    For context, a decent buy-to-let property yields something like 5-8% (but comes with the hassle of actually having to maintain a property).<\/p>\n

    So what\u2019s the big deal about market crashes and dividends?<\/h2>\n

    There\u2019s two really important principles which make market crashes and dividends a great combination:<\/p>\n

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    1. Dividends depend on the business<\/strong> itself and how profitable it has been for that year. It is not <\/strong>linked to share price. This means that dividends are relatively stable<\/strong>. They\u2019re not locked in or guaranteed, but companies are very reluctant to cut or cancel dividends as it doesn\u2019t reflect well.<\/li>\n
    2. The share price<\/strong> of that company on the stock market is just a reflection of what people are willing to pay for a share of that company. It\u2019s a reflection of human psychology and supply\/demand. It can therefore throw up anomalies where people are irrationally selling down. Share prices can therefore be variable and volatile.<\/strong><\/li>\n<\/ol>\n

      Now that you\u2019ve understood those two things, think back to the concept of yield<\/strong> that we discussed earlier.<\/p>\n

      Imagine now if XYZ plc\u2019s share price had tanked during the market crash. Remember we bought 1 share for \u00a310 and got a 50p dividend? Well now, XYZ plc\u2019s share price has tanked to \u00a36 a share.<\/p>\n

      But you\u2019ve researched XYZ plc, and you\u2019re confident that the underlying business is going to be just fine. Perhaps you\u2019ve also heard an interview with the CEO where he talks about how they were well prepared for this crisis, and that actually business is better than ever.<\/p>\n

      You hit the button and buy the shares at \u00a36 per share.<\/p>\n

      Turns out you were right: XYZ plc had a very good year and didn\u2019t suffer too badly from the coronavirus impact. The board declare the same dividend as last year: 50p.<\/p>\n

      But here comes the best bit. <\/strong>You bought your shares at \u00a36 per share, and so your yield is a fantastic 8.3%<\/strong>.<\/p>\n

      And nobody can take your shares away from you either. So for the rest of your life, you will be getting these dividends (which hopefully get better each year as well) and you\u2019ll only ever have paid \u00a36 per share for them.<\/p>\n

      Even better is the fact that as the years go by, if XYZ plc is performing well, it\u2019s likely that its share price is also going to increase. So not only will you be getting income via the dividend, but if you ever decided to sell the shares, you\u2019d be making a profit on them too.<\/p>\n

      The criteria I look for when dividend hunting<\/h2>\n

      Looking for these companies isn\u2019t as simple as just searching for the companies who pay the most dividends. In fact, that can be quite dangerous as data is always historic. So you will be looking at last year\u2019s dividends but trying to work out whether that company can sustain the same dividend in the current climate.<\/p>\n

      If the market (i.e. people) has slashed the share price of a company to such an extent that its dividend yield is now something crazy like 30%, then that is a red flag. It suggests that most people believe that the dividend is going to get cut or, worse, cancelled.<\/p>\n

      I am actively looking for these dividend bargains in the current market.<\/p>\n

      The first company I always look for in market crashes is Shell<\/strong>. Whilst there are definitely some big concerns for Shell, I take very strong comfort from a few key factors:<\/p>\n