The stock market is the only market where things go on sale and all the customers run out of the store….
This is crazy. But it is the truth. When it comes to the stock market, all rational thinking goes out of the windows. This is why private investors severely underperform. When it’s time to buy, they sell. And when it’s time to sell they buy. Madness.
I don’t see people complaining when their favourite pair of headphones/shoes/shirts go on sale. I personally go and buy two or three of my favourite shirts whenever they go on sale. I make the most of it as I know how rarely they go on sale.
Likewise, I don’t complain when the stock market crashes. I see it as being a sale where I am able to pick up shares in my favourite companies at a discount.
Lets look at a real world example to see what I mean.
Take the Coca Cola Company (NYSE:KO). Just a month ago it was trading at $60 a share. Today, after the huge falls in the markets, it is exchanging hands at $38 a share.
Most people will see this 36% fall and shy away from investing in the stock market. I on the other hand see this as an opportunity to buy shares in a high quality company whilst it is on sale.
If I had to invest $10,000 in Coca Cola stock a months ago, I would have received 166 shares in the company.
Seeing as the dividend is $1.64 a share, my 83 shares would have pulled in annual dividend income of $272.
Fast forward to today, the same $10,000 would now buy me 263 shares and my annual dividend income would be $431.
Because of the stock price fall, or because of the Coca Cola share price being on sale, I would be getting $159 extra in dividend income to what I would have gotten just a month earlier. Now that is a sweet deal.
Don’t get me wrong, the performance of Coca Cola will deteriorate whilst the current virus locks down the world. But I don’t envision people will stop drinking Coca Cola, Fanta and Sprite because of this. Coca Cola has survived two world wars, countless mini crises, multiple recessions and a depression. It will survive this. And it can be argued that it will come out stronger after this period of chaos as many of its competitors who operate on a smaller scale will be put out of business.
But that is besides the point. I am not saying that I am buying Coca Cola in specific at this point. I am just using it as an example to illustrate how investors can pick up stocks at higher dividend yields than I could just a month ago.
And this is a particularly important point for me being a dividend focussed investor.
My goal is to become financial independent via dividend growth stocks. I am investing with the aim that all my expenses can be covered via dividends.
This task just became a whole lot easier with the drop in stock market prices.
Say I was purely interested in investing in the FTSE 100 only. Just over a month ago, if I wanted an annual dividend of £15,000, I would have had to invest a total of about £320,000.
Today, with the drop in the FTSE 100 price, I only need to invest about £225,000 to get that same £15,000 in annual dividend income.
This is why I say The Stock Market Crash Is Turbo Charging My FIRE Plans.
I need much less money now than I needed before to reach my goals.
The current stock market crash can be seen as an opportunity for people in my situation who are still in the accumulation phase of their life cycle – provided the lockdown don’t last too long.
So rather than panic, see the opportunity the market drop has brought with it. It has essentially shaven a few years of extra savings needed for you to become finically independent. That can only be a good thing.
Three years from now we’ll all be looking back at this time as a great buying opportunity. It’s an extreme likelihood. I don’t know if this panic is going to get worse, and I never know in real time whether the panic is going to be the once-in-a-generation kind, but I do know that it is extremely unlikely. Nearly all panics seemed scary at the time. But they also turn out to be fabulous buying opportunities.