Durable Dividends

Why I Celebrate Share Price Weakness

Nick Ward

56 postsDecember 3, 2021

Today, one of the biggest financial news related headlines has to do with DocuSign’s (DOCU) 40%+ sell-off. The company posted earnings after the bell yesterday, beating analyst estimates on both the top and bottom lines, but came up short when it came to forward looking earnings. In short, this company that has grown its revenue by more than 50% thus far year-to-date, and is expected to post 100%+ earnings growth for the full year in 2021, is calling for a major slowdown in 2022. The company is now calling for de-accelerating Q4 sales growth and the fear amongst investors is that this will carry over into next year as well. The market, which had been valuing DOCU shares as a speculative growth stock, was forced to make a U-turn, with previously rabid buyers quickly becoming sellers, now that it appears that the rapid growth story is over with.

Another major story in the financial news today is focused on Chinese company DiDi de-listing its shares from the New York Stock Exchange. This has sent just about all Chinese equities that trade on U.S. stock exchanges lower. The KraneShares CSI China Internet ETF (KWEB) is down nearly 7% as I write this and other individual names are hurting much worse. The threat of de-listing and of a more isolatory stance from China with regard to allowing foreign investors to own shares of its domestic big-tech names has been a widely discussed market threat throughout this year.

It has caused names, like Alibaba (BABA), which is very popular amongst U.S. investors because the stock is known as the Amazon.com of China, with a well diversified revenue stream which involves strong stakes in eCommerce, cloud, automation, and artificial intelligence segments, to suffer in a big way as well.

Although BABA is producing fantastic fundamental growth, they’re down nearly 48% on a year-to-date basis. BABA shares hit a high of approximately $310/share in late 2020 and today, they’re trading for roughly $112/share. This means that Alibaba shares are down ~64% from their highs and looking at the stock’s chart, the momentum remains steadily to the downside.

This is yet another example of a potentially broken thesis.

While BABA’s woes are not fundamental in nature, they do point towards a systemic risk that has investors running for the hills.

Alibaba has always been a speculative investment, not because of its sales/earnings growth and the multiples that investors have placed upon them (historically, BABA’s price-to-earnigs ratio has been relatively low), but because of the threat that Chinese regulators pose to the company, its long-term growth potential, and even potentially its international shareholder base.

It’s impossible to know whether or not Chinese government leadership will take steps which result in the de-listing of BABA shares from U.S. exchanges, or even further, making it illegal for foreign investors to own shares; however, large institutional investors have been selling the stock in droves because of the unquantifiable nature of this perceived risk.

The fact is, I feel terrible for investors of both of these companies. I don’t wish capital destruction on anyone; however, that is exactly what is happening to bullish individuals as names like this sell-off. I didn’t write this article to simply point out the weakness in BABA and DOCU, but instead, to highlight one of the major differences between owning shares of companies that are being driven by speculative growth stories and blue chip dividend growth stocks.

The truth of the matter is, in nearly a decade of managing my personal dividend growth portfolio, I don’t think I’ve ever seen a stock experience a 40%+ sell-off in a single trading session.

Obviously, this data is anecdotal, but I wouldn’t be surprised if this is the case for most dividend growth investors because generally speaking, mature, defensive, blue chip, cash-cow type of companies don’t experience these types of drawdowns.

Sure, no stock is immune to disaster. They’re all risk assets. However, the hallmark of a blue chip dividend growth stock is predictability.

To produce a long streak of annual dividend raises in a sustainable fashion, companies must also produce reliably increasing fundamentals which support their shareholder returns.

And therefore, they’re not nearly as likely to majorly surprise and disappoint the market like DocuSign did last night.

Furthermore, mature companies don’t often trade with the nosebleed valuations that spark such steep sell-offs. For instance, even after its 40%+ sell-off today, DocuSign is still trading with a double digit price-to-sales multiple.

Yes…that’s price-to-sales. Not price-to-earnings.

While DocuSign is a profitable company (the consensus analyst estimate for the current fiscal year points towards the company generating earnnigs-per-share of $1.95/share), the stock is still being evaluated on things like total addressable market (TAM) and sales growth potential. Coming into the trading session today, DOCU shares were trading for approximately 132x blended earnings. That pointed towards enormous risk and while I doubt many investors (except the most ardent shorts) were calling for a 40% sell-off in this company’s near-term future, I’m not exactly surprised to see it because of the speculative nature of that profit-based valuation.

But, getting back to dividend growth stocks…

While they don’t typically experience this type of major volatility, I actually find myself hoping that they do.

Why?

Well, because as a dividend growth investor, I’m always hoping to buy the blue chip stocks within my portfolio and on my watch list into weakness.

I’ve touched upon this many times before, but in light of the recent non-dividend stock sell-offs in the spotlight today I wanted to lay it out clearly in an article.

The problem with owning a stock like Alibaba or DocuSign, in my opinion, at least, is that when they sell-off like this, you have no support (in terms of a dividend).

When one of my holdings experiences a short-term dip, so long as the fundamentals remain in place, I can at least expect to receive my regularly scheduled dividend payments (once again, no dividend is ever 100% safe either, but dividend safety is fairly simple and easy to track, looking at earnings, cash flows, and balance sheets).

Furthermore, when shares dip, I get excited because buying discounted shares allows me to achieve two primary goals.

First of all, a lower share count allows me to increase the number of shares that a limited amount of capital can buy.

Let’s say that I have $5,000 to invest this month. If I was targeting Company XYZ for a purchase, and it was trading for $100.00/share, that means I would have been able to buy 50 shares.

Well…if Company XYZ’s shares fell 20%, to $80.00/share, well then I’d be able to purchase 62.5 shares, instead.

Let’s say that Company XYZ pays a $3.00/share annual dividend. Well, at $100.00/share, that means the stock was yielding 3%. And, when buying 50 shares, I would have put myself in a situation to generate $150.00 in annual passive income.

After that theoretical 20% sell-off to $80.00/share, Company XYZ’s $1.00/share dividend, while unchanged, would now represent a 3.75% yield. And, those 62.5 shares that I could now purchase for the same $5,000 I was looking to invest would generate $187.50 in annual income.

The $187.50 in annual income that this theoretical 20% sell-off created is 25% larger than $150, showing that the math works out in my favor, as far as increasing my passive income, as share prices fall.

This is why I find myself actually rooting for share price weakness.

The issue that investors in speculative growth stocks have, when they’re considering averaging down into weakness like this, is that no matter how high their conviction is that names like BABA or DOCU sign will bounce back and generate a bunch of wealth for them in the future (and who knows, they just might) that thesis is anchored in speculation.

No one knows what the future holds. There’s no way around that without a working crystal ball, which doesn’t exist, to my knowledge. As I’ve pointed out throughout this article, the same general rule holds true for dividend growth companies. It’s impossible to completely avoid risk in the equity markets. However, when we’re talking about immaculate blue chips, such as the Johnson and Johnsons (JNJ), the Coca-Colas (KO), the Realty Incomes (O), etc, of the world…well I’d be willing to bet a lot of money that these companies who multi-decade dividend growth streaks in place have the operations, the talented management teams, and the capital structures in place to weather whatever storms the unpredictable future throws at them, allowing them to continue to pay those reliably growing dividends for decades more to come.

Actually, I suppose in a way, I already have made this bet.

Roughly 80% of my invested capital is allocated towards blue chip dividend growth stocks. I’m basing my plans of retirement and financial freedom on the reliably growing dividends that the companies that I own pay out.

And due to my focus on the passive income that my portfolio generates, and not the value of my shares, I’d be perfectly content to see one of the best-in-breed companies that I own take a major tumble.

Historically, I’ve made a lot of money buying blue chips when they’ve dipped and more importantly, every opportunity that I have to do so not only improved the risk/reward scenario that I faced when putting new capital to work in the markets (lower valuations on companies that offer reliably growing fundamentals generally result in higher return potential), but also accelerated my journey towards financial freedom by allowing my to use near-term share price weakness to strength my passive income stream.

If you’re looking for an actively managed portfolio which focuses on accumulating shares of blue chip dividend growth stocks into weakness, then please check out The Intelligent Dividend Growth Investor.

This 25 stock portfolio has outperformed its major benchmark, the Vanguard Dividend Appreciation ETF (VIG) since inception, up approximately 82.3% compared to the VIG’s 45.5% performance. What’s more, the IDI portfolio maintained a perfect dividend growth record throughout the COVID-19 pandemic thus far and moving forward, I expect that it will continue to generate reliably increasing passive income.

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

Why I Celebrate Share Price Weakness

Nick Ward

56 postsDecember 3, 2021

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Why I Celebrate Share Price Weakness

56 postsDecember 3, 2021

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