Yesterday I explained that I do not believe we are going to see a “correction” as bad as something like 08/09. I stated that after this 6 year bull market people should expect stocks to drop at some point.
Today I am going to elaborate a bit more on why I think the current stock market drop won’t turn into a catastrophe (at least in terms of the Dow Jones).
First there is major support for the Dow at 12,000 points. You can see it in the chart below.
If the Dow drops to the 12,000 from today we are looking at a further 12% to 15% drop.
The last time the Dow was at this level was back in 2011. So, why do we know that there are strong hands at this level? I can give you a concrete example using Johnson & Johnson.
Lets say you bought shares of JNJ in 2011 when it was trading at $65 a share. Today it JNJ is trading for around $92 so you would have a 30% capital gain. Not to bad. Now here is the important part, since 2011 JNJ has raised it’s dividend 6 times!
JNJ now pays out a total of $12.92 a year per share in dividends. Your new effective yield would be 12.8% a year (65/12.92 * 100)!
Ok now let me as you this, what would it take for you to freak out and sell shares in one of the oldest companies on the Dow Jones that raises its dividend every year and makes tons of freaking money? Would you rather collect almost 13% a year from this company or put your money in the bank for a chance at 1% interest?
OK. I thoughts so.
“Sure” you say, “But what about one of the less attractive stocks of the Dow?”.
Lets do the same thing with McDonald’s. I think we can all agree that McDonald’s has not been popular. The trend is to better restaurants and McDonald’s revenue has been declining and some stores have been closing, however they still are the biggest restaurant in the world.
Lets say we bought MCD for $80 a share in 2011. Today we would have about a 13% capital gain, not that great but better than a kick in the teeth.
MCD has raised their dividends 5 times since 2011, and you effective yield would 4.25%. Not awesome like JNJ but really not that bad either and still a lot better than the bank.
So what would make these stocks plummet past their 12,000 support level? You got it! Slashing dividends. If you see various Dow components start to cut their dividends then you should know there is a serious problem. I’m not saying it won’t happen, but I doubt to the extent of 08/09 where just about every company was slashing left and right.
Ask yourself can you stomach a 15% drop in the Dow if you own these stocks? If so, then all you need to do is pay attention to dividend cuts. So far the list for 2015 is small and are mostly coming from the resource sector. You can see them here: http://www.streetinsider.com/dividend_biggest.php?type=cuts
Now of course I’m just talking about the big guys in the Dow. If you have a lot of stocks that are growth stocks, stocks that have a good story and are more speculative you are going to be experiencing a lot of volatility. Please use trailing stops!
I am currently making a free trailing stops system that I will make available to you. If you haven’t already please enter in your email over on the right hand side of the page to get updates. Protecting your capital and limiting your losses is the most important thing you can do if you have entered into the stock market.
Until next time!