The Forgotten Key To Great Investing
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If you’re a regular viewer of my YouTube channel, you’ll know that I occasionally make videos discussing stocks that are discounted and have seen a drop in share price. Whenever I make these videos, I’ll get at least one disparaging comment criticizing me for talking about stocks that have underperformed (it never fails—occupational hazard).
This criticism usually comes in comparison to the high-flying “it” stock of the moment whose share price has soared. Their underlying point is usually something like: Why would you buy these “losers” when you could easily double your money with an obvious “winner” like stock XYZ that’s already up 150% this year?
On one hand, I see their point. Essentially, they're questioning why anyone would choose to invest in a stock that has recently performed poorly when there are other stocks out there that have recently performed exceptionally well.
It’s a fair question, but this perspective misses one of the most important elements of investing: the poor performance is what sets the stage for the opportunity. The depressed valuation from a stock’s declining share price is precisely what creates these opportunities, although this is often overlooked.
At the end of the day, the main goal of investing is to acquire and accumulate assets, especially for dividend investors who aim to build a consistent stream of passive income. If you’re going to be a “net buyer” of stocks, believe it or not, the ideal scenario is to invest in a stock and then see its share price go down.
Of course, this hinges on why the price went down. Assuming the reason wasn’t anything catastrophic (e.g., macro-related issues, short-term setbacks, or insignificant news blown out of proportion), a lower share price should excite you because you can buy more shares with the same amount of money, furthering your cause as a “net buyer” and cash-flow collector.
Additionally, when you calculate the dividend yield—how much the dividend pays out relative to the current share price—buying at a lower share price results in a better cash-flow return on your investment. As the share price decreases, the dividend yield increases.
Still, it’s human nature to opt for the flavor of the week. Doing so is easier than going against the grain and investing in unloved stocks with depressed valuations (which are often unloved only because they have depressed valuations—interestingly enough). However, the key to great investing is being able to zig when everyone else is zagging.
As an investor, you should be actively seeking out mispriced opportunities (like the three I’m telling you about here). The whole point is to find the treasure in what others consider trash, which is no easy task. It requires a lot of research and thought, but that’s how the opportunities are found.
Having said all of that, following the herd does have its place. Momentum investing can indeed make you money (if you’re timing is on point), but it’s important to remember that the reasons behind your investment are just as significant as the investment itself.
In many cases, especially with the “it” stocks, investors tend to pile in because they see others making money and don’t want to miss out rather than because they believe in and understand the merits of the underlying business.
In my opinion, that’s not a sustainable approach to investing, and such situations tend to be like building a house of cards. Eventually, you’ll either run out of cards, or a gust of wind will come along and knock it down.
With that said, I want to hear from you: What do you think are the most mispriced opportunities in the market right now? Write to me here and let me know.
And a big thank you to all of the readers who responded to last week's newsletter! You can read some of the responses down below in the "Hot Takes" section. 👇
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All My Dividend Income In June | $69,600 PORTFOLIO
In June, I received 9 dividend payments from some of my favorite companies like Visa (V) and Snap-On (SNA).
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📚 3 Awful Dividend Aristocrats - I've been reading a lot of articles from Robert and Sam Kovacs on Seeking Alpha lately, and this one sends up a red flag on three dividend aristocrats that may be more foe than friend to your dividend portfolio.
SINCE YOU ASKED 💬
"What do you think of a young investor going more risky? I'm looking at dividend stocks like ORC, AGNC and PNNT."
- Gavin Grant | YouTube
While I understand the draw of high-yield dividend stocks—believe me—I personally don't think investing this way is a good idea.
As a young, new investor, it's natural to want the most amount of dividends in the shortest amount of time, and I don't blame you. However, stocks like ORC and AGNC are certified yield traps.
While they may have temptingly high yields, they also have a history of regularly cutting their dividend payments, which is the exact opposite of what you should be looking for in an investment.
Source: ORC Dividend History | Seeking Alpha
Instead, focus on companies that are growing their dividends over time, even if they have a lower starting dividend yield. Consistent dividend growth is a sign of a company's financial health and stability, and this growth aligns more with the fundamental goal of dividend investing.
Have a question? Ask me here to see it featured in an upcoming newsletter.
HOT TAKES 🔥
Last week, I asked readers which discounted stock they have their eye on for July. Here are some of the responses:
Pat said: A beaten down dividend payer I'm looking at adding to is Nike (NKE). It just got HAMMERED today after reporting lower revenues Q2 and a lower outlook. It is now at a 52 week low. Nike is Nike. It will return. Also, Paris Olympics in t-minus like a month. No way this stock stays down through the summer.
Mark said: My top picks are SBUX, EPD, BMY, and O. I'm fixated on those currently. Love VICI! If I wasn't targeting O, I guarantee you VICI would be in the crosshairs. I'm watching UPS and KR closely as well. And it's really hard to pass up PFE as part of my buy strategy over the next 60 days.
Kris said: Two companies I'm really excited about right now are Nike (NKE) and LVMH (LVMHF). Even though they're both in the same industry, they're fantastic companies and some of the biggest brands in the world. Nike has really caught my eye after dropping 20% in the last month. It looks like a great buying opportunity to me.
