Durable Dividends

The Benefits of Buying Into Weakness

Nick Ward

56 postsMay 18, 2021

So often, I highlight the fact that the dividend growth investing strategy incentivizes buying low; however, I’ve never posted an article here explaining exactly why that is. Well, this changes today.

We all know that buying low and selling high is the basic mantra that value investors live by. And, as I’ve said before, the marriage of the traditional value investing principles and the income oriented focus on dividend growth investing lead to what I believe to be the simplest and easiest route towards financial freedom.

Why? Because to make money in the markets by buying and selling stock, you have to correctly time two events (the entry and exit of an equity position). However, the dividend growth strategy involves only one of these events: a well timed entry.

Once dividend growth investors have accumulated shares of the highest quality dividend growth stocks, the best course of action over the long-term is likely to simply hold those shares, collect the dividends, re-invest them, and allow the exponential compounding process over time generating substantial wealth.

Instead of worrying about valuation, market sentiment, share price movement, technical analysis, etc… we can simply focus on dividend growth and safety metrics with regard to whether or not it makes sense to continue to own shares of a given company, and frankly, these are much easier to track due to their relatively objective nature.

So, now that we’ve established that selling shares is not a priority for most dividend growth investors, we can really dedicate our energy and focus towards ensuring that we’re accumulating the highest quality of names at the lowest valuations and therefore, locking in the widest margin of safeties.

There are multiple benefits to doing so, which are going to be the topic of this week’s article.

We all know that buying low and selling high is good, but many investors struggle to properly identify attractive entry points. And what’s more, even if they’re able to use fundamental analysis to identify an attractive valuation, many investors struggle with the intestinal fortitude required to buy equity shares ‘into weakness’. This can go against our natural instinct due to the fear of “catching a falling knife.”

Anyone who has made a living by buying equities when they’re experiencing sell-offs has reached out and caught a stock by the blade, rather than the handle.

Admittedly, it can be painful to watch the value of a recent investment fall, due to continued negative momentum. Yet, the dividend growth investing strategy can act as a panacea for many of the mental woes associated with unrealized losses in the market.

First of all, one of the most attractive aspects of dividend growth investing is that we’re generally only focused on owning blue chip companies.

For a company to have an established dividend growth streak, it will have had to achieve sustainable dividend growth over time. And, for this to occur, the company will have had to generate sustained fundamental growth, both on the top and bottom-line, while also maintaining strong margins (which signifies a wide competitive moat).

Furthermore, for a company to have strong dividend growth prospects moving forward (because it’s important to understand that dividend safety is not just about backwards looking fundamental metrics), investors must also consider things like balance sheet health in the present and forward looking sales, earnings, and cash flow growth expectations.

Companies that possess all three of these things – an illustrious growth history, strong present results, and sustainable growth prospects – are likely to do well over the long-term, which means that unrealized losses can easily become unrealized gains and potential profits (if you ever become interested in liquidating the asset).

The solace that this provides can help investors to avoid one of the most common pitfalls they face: selling into irrational weakness.

Not only is this a common mistake that investors make, but it’s one of the worst, in terms of setting individuals back on their journey towards financial freedom.

If the fundamentals of a company remain strong, yet share prices continue to fall, the rational thing to do in most situations is to continue to buy shares – not sell them.

This may seem counterintuitive to some – especially those who’ve been conditioned by the financial media to operate with a short-term time horizon, focusing primarily on sensational headlines and therefore, market momentum, rather than long-term trends driven by fundamental growth. However, as you’ll see in a moment, there are various reasons why averaging down into weakness makes perfect sense as a dividend growth investor.

So long as fundamentals remain intact, by averaging down one’s share price, investors are also reducing their risk (assuming that they’re staying disciplined to asset allocation thresholds) by increasing their margin of safety.

In the event of a sentiment shift, which leads to multiple expansion, the combination of a lower cost basis and the ongoing fundamental growth of the company is likely to create a situation where mean reversion results in strong capital gains.

But, buying into weakness isn’t just about capital gains. It’s also about augmenting one’s passive income stream.

When we average down our cost basis, we’re also increasing our yield on cost.

In other words, we’re increasing the amount of income that a certain amount of invested capital generates.

What’s more, by buying into weakness, we’re increasing the share count that a set amount of capital can accumulate, and bodes well for our strategy, which ultimately boils down to two things: how many shares we own and the amount of dividends those shares pay.

To show an example of the multi-faceted benefits of buying into weakness, let’s use a theoretical Company X. It trades for $100/share, and is a high quality dividend growth name which has strong fundamentals, strong growth prospects, and therefore, pays a relatively safe $3.00/share dividend, resulting in a yield of 3%.

Imagine buying shares here – let’s say 20 shares for an initial investment of $2,000 – because we’re feeling great about that 3% yield on cost, and looking forward to years of beautiful dividend increases.

Let’s imagine you bought shares on a Monday, and throughout the rest of the week, Company X sold off from your cost basis of $100/share down to $80/share.

Since you bought shares at the beginning of the week, you probably hated to see this 20% sell-off.

However, it’s important to acknowledge that you had no way of knowing that this would occur. Since you liked the valuation and the fundamental outlook at $100, and nothing has changed to affect your dividend safety outlook, it makes a lot of sense to buy shares at $80, right?

In other words, this 20% sell-off isn’t something to be hated, but instead, to be viewed as an opportunity.

At the beginning of the week, $2,000 bought 20 shares of Company X. Well, in this scenario, by the end of the week, $2,000 now buys 25 shares of Company X.

That original $2000 purchase was set to generate $60 in annual income. Well, at the end of the week, a second $2,000 purchase will result in $75 in annual income, which represents a yield on cost of 3.75% on the second lot.

By buying shares after the 20% sell-off, you put yourself in a situation to increase your passive income by 25%, on a relative basis, to your first purchase ($75-$60 = $15; $15/$60 = 0.25%).

Let’s say Company X’s sell-off isn’t complete. The next week, shares fall by another 20%, ending the week at $64/share.

Fear sets in, but you triple check your analysis, find that the company’s fundamentals remain strong, and realize that the market is trading on irrational sentiment as opposed to objective reasoning.

This provides solace and confidence to buy another lot of shares.

At $64/share, Company X’s $3.00/share dividend now represents a yield of 4.69%. And, a $2,000 investment here allows you to buy 31.25 shares of the company (56.25% more than your original 20 share purchase).

Those 31.25 shares generate $93.75 in annual income, which is 56.25% more than the income generated by your original purchase and 25% more than the $75 in income generated by your second purchase.

And now, after putting $6,000 to work, you now own 76.25 shares, with an average cost basis of $78.69 and an average yield on cost of 3.81%.

Moving forward, from a passive income standpoint, your position is now 27% more effective (relative to your original 3% yield on cost) – a figure generated by discipline and bravery.

I know these numbers can become a little tedious (and rather boring), but I promise, it’s not boring when we’re dealing with real money and you begin to see the productivity of your invested capital increase.

I also know that this is all rather simplistic math. But, that’s the point.

Regardless of how simple buying into weakness may seem, when sell-offs occur, many investors become emotional, irrational, and for whatever reason, lose sight of the basic arithmetic that could otherwise make them a lot of money.

Thankfully, the dividend growth strategy doesn’t require a degree in rocket science. It simply requires an understanding of fundamentals related to equity evaluation and dividend safety metrics, discipline, patience, and a bit of bravery from time to time.

If those are qualities you exude and you’re interested in learning more about how to create a reliably increasing passive income stream with dividend growth stocks, then please check out The Intelligent Dividend Investor, our premium service which is 100% focused on blue chip equities that produce growing dividends year in and year out.

By staying disciplined and buying best-in-breed types of companies during the market downturn in 2020, I’ve been able to produce strong market-beating performance in the IDI portfolio. These trades are posted in real-time for members, alongside weekly portfolio review reports, as well as an monthly newsletter, which views the market through a dividend growth lens with both a macro and a micro perspective.

Nick Ward

56 posts

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Nicholas Ward is a research analyst who currently writes for Seeking Alpha, The Dividend Kings, iREIT, and Forbes Real Estate Investor. Before that, he was Founder and Editor-in-Chief of The Dividend Growth Club, as well as the Income Minded Millennial. Nicholas has also contributed to Sure Dividend, Investing Daily, and The Street, where he covered stocks in Jim Cramer's Action Alerts PLUS Portfolio.

Nicholas holds a bachelor of arts from The University of Virginia, where he studied English and studio art. Prior to transitioning into the financial industry, he managed a vineyard in the foothills of the Blue Ridge Mountains.

REIT Mutual Fund	Symbol
Alpine Realty Income and Growth Fund	AIGYX, AIAGX
American Century Real Estate Fund	REAIX, REACX, AREEX, AREWX, ARYCX, AREDX
Real Estate Securities Fund	MRESX
AR Capital Real Estate Income Fund	ARIAX, ARICX, ARIPX
AssetMark Real Estate Securities Fund	AFREX
Aston/Harrison Street Real Estate Fund	AARIX, ARFCX
Baron Real Estate Fund	BREIX, BREFX
BlackRock Real Estate Securities	BIREX, BAREX, BCREX
Brookfield U.S. Listed Real Estate Fund	BRUAX, BRUCX, BRUIX, BRUYX
CGM Realty Fund	CGMRX
West Loop Realty Fund	REIIX, REIAX, REICX
Cohen & Steers Institutional Realty Shares	CSRIX
Cohen & Steers Realty Income Fund	CSEIX, CSDIX, CSBIX, CSCIX
Cohen & Steers Realty Shares	CSRSX
Columbia Real Estate Equity Fund	CREAX, CREIX, CRRVX, CRERX, CREEX, CRRFX, CREWX, CRECX, CREBX
Compass EMP REC Enhanced Volatility Weighted Fund	CWRAX, CWRIX, CWRTX, CWRCX
Davis Real Estate Fund	RPFRX, DREYX, DRECX, DREBX
Delaware Real Estate Investment Trust Portfolio II	DPRTX, DPRBX
Delaware Real Estate Investment Trust Portfolio	DPREX, DPRSX, DPRRX, DPRCX
DFA Real Estate Securities Portfolio	DFREX
Dunham Real Estate Stock Fund	DAREX, DNREX, DCREX
DWS RREEF Real Estate Securities Fund	RRRRX, RRREX, RRRAX, RRRSX, RRRBX, RRRCX
DWS RREEF Real Estate Securities Income Fund	REFAX, REFCX, REFIX, REFSX
Eaton Vance Real Estate Fund	EAREX, EIREX
EII Realty Securities Fund	EIIRX
Fidelity Advisor Real Estate Fund	FHEIX, FHEAX, FHETX, FHECX, FHEBX
Fidelity Advisor Real Estate Income Fund	FRIRX, FRIQX, FRINX, FRIOX
Fidelity Real Estate Income Fund	FRIFX
Fidelity Real Estate Investment Portfolio	FRESX
Fidelity Spartan Real Estate Index Fund	FSRNX, FRXIX, FSRVX
Fidelity Series Real Estate Equity Fund	FREDX, FREFX
Fidelity Series Real Estate Income Fund	FSREX, FSRWX
Forward Real Estate Long/Short Fund	KSRYX, FRLSX, FFSRX, KSRAX, KSRCX, KSRBX
Forward Real Estate Fund	FPREX, FFREX, KREAX, KRECX
Forward Select Income Fund	KIFYX, FSIMX, FFSLX, KIFAX, KIFBX, KIFCX
Franklin Real Estate Securities Fund	FREEX, FRLAX, FRRSX, FSERX
GMO Real Estate Fund	GMORX
Goldman Sachs Real Estate Securities Fund	GREIX, GRETX, GREAX, GRESX, GRERX, GREBX, GRECX
Great-West Real Estate Fund	MXREX
Heitman REIT Fund	OARTX, OBRTX
ING Real Estate Fund	CRARX, IREWX, IDROX, CLARX, CRWRX, CRCRX, CRBCX
INVESCO Real Estate Fund	REINX, IARFX, IARIX, IARYX, IARAX, IARRX, IARCX, AARBX
Ivy Real Estate Securities Fund	IRSAX, IREIX, IRSYX, IRSRX, IREEX, IRSCX, IRSBX
John Hancock Real Estate Securities Fund	JIREX
Johnson Realty Fund	JRLTX
J.P.Morgan Realty Income Fund	URTLX, JRIRX, URTAX, URTBX, URTCX
J.P. Morgan Security Capital U.S. Core Real Estate Securities Fund	CEEAX, CEERX, CEEFX, CEESX, CEECX
J.P. Morgan U.S. Real Estate Fund	SUSIX
Lazard U.S. Realty Equity Portfolio	LREIX, LREOX
Lazard U.S. Realty Income Portfolio	LRIIX, LRIOX
Manning & Napier Real Estate Series	MNRIX, MNREX
Morgan Stanley Institutional U.S. Real Estate Portfolio	MSUSX, MUSDX, MSULX, MURSX
Natixis AEW Real Estate Fund	NRFAX, NRFYX, NRFBX, NRFCX, NRFNX
Neuberger Berman Real Estate Fund	NBRIX, NBRFX, NREAX, NRERX, NRECX, NRREX
Nuveen Real Estate Securities Fund	FREAX, FARCX, FRSSX, FREBX, FRLCX, FREGX
Oppenheimer Real Estate Fund	OREAX, OREIX, OREYX, ORENX, OREBX, ORECX
PHOCAS Real Estate Fund	PHREX
PIMCO RealEstateRealReturn Strategy Fund	PRRSX, PETPX, PETAX, PETDX, PETCX, PETBX
Pioneer Real Estate Shares	PWREX, PYREX, PCREX, PBREX
Principal Real Estate Securities Fund	PIREX, PIRPX, PREPX, PRETX, PREJX, PRRAX, PRERX, PRENX, PRAEX, PRCEX, PRLEX
ProFunds Real Estate UltraSector ProFund	REPIX
Prudential Select Real Estate Fund	SREAX
Prudential U.S. Real Estate Fund	PJEAX, PJEZX, PJECX, PJEBX
REMS Real Estate Income 50/50 Portfolio	RREIX
REMS Real Estate Value-Opportunity Fund	HLRRX, HLPPX
Rydex Real Estate Fund	RYREX, RYHRX, RYCRX
SA Real Estate Securities Fund	SAREX
SEI Institutional Mgd Real Estate Fund	SETAX, SEIRX
Spirit of America Real Estate Income & Growth Fund	SOAAX
SSgA Clarion Real Estate Fund	SSREX
Stratton Real Estate Fund	STMDX
T.Rowe Price Real Estate Fund	TRREX, PAREX
TIAA-CREF Real Estate Securities Fund	TIREX, TRRPX, TRRSX, TCREX
Vanguard REIT Index Fund	VGSNX, VGRSX, VGSLX, VGSIX
Virtus Real Estate Securities Fund	PHRAX, PHRIX, PHRCX, PHRBX

REIT ETF	Symbol
Flex Shares	ASET
Wisdom Tree Global Ex-US	DRW
S&P 500 Equal Weight	EWRE
iShares FTSE Industrial/Office	FNIO
MSCI Real Estate Index	FREL
S&P REIT Index	FRI
First Trust S&P REIT	FRI
iShares Real Estate 50	FTY
Flexshares Global	GQRE
iShares Cohen & Streers	ICF
iShares International Developed RE	IFGL
iShares US RE	IYR
Premium Yield Equity REIT	KBWY
ETRACS Monthly Pay 2x Leverage	MORL
Market Vector Mortgage	MORT
iShares Global REIT	REET
iShares FTSE Mortgage	REM
iShares Residential	REZ
IQ US Real Estate Small Cap	ROOF
iShares FTSE NAREIT Retail	RTL
DOW Jones Global RE	RWO
SPDR Dow Jones	RWR
Schwab US REIT	SCHH
Super Dividend REIT	SRET
ProShares Ultra RE	URE
Vanguard REIT	VNQ
Vanguard Global ex-US	VNQI
iShares International Developed	WPS
Wilshire US REIT	WREI
Pacer Benchmark Data & Infrastructure RE	SRVR
Pacer Benchmark Industrial RE	INDS
Pacer Benchmark Retail RE	RTL
Hoya Capital Housing	HOMZ
NetLease Corporate RE	NETL

REIT Name	Ticker	Annual Increases/yr
Federal Realty	FRT	51
Universal Health Realty	UHT	33
National Retail Properties	NNN	29
Realty Income	O	27
Tanger Outlets	SKT	26
Urstadt Biddle	UBA	25
Essex Property Trust	ESS	25
W.P.Carey	WPC	22
National Health Investors	NHI	17
Equity Lifestyle	ELS	15
Digital Realty	DLR	15

The Benefits of Buying Into Weakness

Nick Ward

56 postsMay 18, 2021

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The Benefits of Buying Into Weakness

56 postsMay 18, 2021

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