What to do in Volatile Markets?

All,

Here is a strategy that at first seems to go against the logic and day-to-day trading of the markets.  Normally, when you want to make a good gain quickly on a stock, you buy lower and sell higher, especially once your gain is over 10%.  Do this multiple times, and you start to compound your 10% gains.  You don't worry about whether the stock pays a dividend, because you're not going to hold it for the 3 months till payout anyway.

However, trying to do this in today's market of 700+ point swings within one day, and today's times of up 600 today, down 900 tomorrow, is next to impossible.  So, what should be done?  I think this volatile swinging makes dividend shares very appealing, and here's why:

- When dividend shares are cheap, you get more dividend per dollar invested, as long as the company doesn't lower their dividend also.
- As prices swing wildly, you have more opportunities to buy up more and more stock in these companies paying dividends, especially when the stock swings negative
- When a company pays a dividend, it usually means they are a good company that can afford to do so, meaning they should ride out storms better than others, like a carrier as compared to a patrol boat.
- When the market finally gets a grip, you will make money from both sides, capital appreciation and locking in a high yield to dollar ratio, as well as having been able to acquire more and more stock as prices swung wildly.
- And if the stock market takes 3-5 years to recover losses, at least you can ride through it all making money on dividends.  The 70's saw a long period of time where the DOW didn't gain at all.  Those who held dividend shares though made enough money to at least be satisfied and ready for the nearly 20 year bull run that occurred afterward.

A good example of this is the Huaneng Power company in China, or HNP.  The stock is down nearly 50% from it's high, and was down as much as 25% this week alone.  Yet it now yields nearly 9%.  This morning it was down 6%, so I bought down on the stock.  For every share I purchased at 16.80, I will get a dividend of $.43 each quarter, or $1.75 each year for as long as they pay a dividend.  If next year the stock is trading at $30 a share, I still lock in the dividend yield, plus the appreciation with it.  As well, to demonstrate how crazy things are on the trading floor, when I bought HNP, the stock was down 6% on the day.  It closed up 5%.  So those shares purchased will not only yield a dividend, but they appreciated 11% in one day.  Not that I expect that appreciation to hold of course.  But when it goes down again to 16.80 or lower, I'll buy more knowing that there is a dividend there to smooth out the bumpy ride.

Of course, this is why options are very attractive too, but that is another story.

So it may not be a bad idea to move some of your investments to dividend shares.  There are plenty of them out there that are cheap but are good companies.

--
Tijs Limburg
Chairman and CTO of DMX - Digital Media eXceleron, Inc.
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