The Great Recession of 2007–2009 was nothing short of a nightmare. Years of massive gains in the stock and housing markets disappeared in a few short months.
Millions of homes ended up in foreclosure, often tying courts up for years. Job losses were worse. And even those who kept their jobs watched as their 401(k)s became – as the grim joke went – 201(k)s.
Nothing was safe. Even some money market funds, designed to always trade with a value of $1, famously “broke the buck.”
But in hindsight, it’s clear that the panic created the buying opportunity of a lifetime…
I was a few years out of college and in my early 20s… And I spent most of my focus on growing my career. Yet, I had cash to buy while others were panicking out of the market.
As someone who had been investing in the stock market since middle school, I’d already seen a similar cycle play out when the tech bubble burst.
I even made my way through college playing the markets in the early 2000s, with well-timed trades in the real estate, commodities, and shipping sectors.
Yet, by 2007, market valuations had gotten frothy. I couldn’t find a good deal with a lot of short-term upside.
The S&P 500 was trading at a then-high price-to-earnings (P/E) ratio of 16. Housing was priced at seven times income – up from just over four times income at the start of the 2000s.
And, much like today, interest rates were rising while growth slowed. Last, but certainly not least, the yield curve was inverting, indicating a possible recession ahead.
So I took some money off the table and decided to sit in cash.
Being patient wasn’t easy in the fast-paced market days of 2006 and 2007. But I resolved to wait for clear opportunities rather than try to just invest in overpriced trends.
That patience paid off in spades. As markets melted down, overvaluation became undervaluation.
By being largely in cash, I was able to score some incredible bargains in early 2009.
We’re talking about buying McDonald’s for $55 per share… and Disney for around $19 per share… and that’s just blue-chip names.
Today, I’m up over 530% on McDonald’s. Disney is up about 507%.
But those total returns don’t tell the full story of why these were the smart plays at the time. It has to do with one of the greatest, unsung secrets of investing.
I’m talking about “yield on cost.”
The Secret to a Lifetime of Market Income
Yield on cost simply looks at your current dividend payment on a stock today, divided by your original purchase price.
If you buy the right kind of dividend payers, your yield when measured against what you originally paid for the stock will rise over time. In some instances, your yield on cost will rise well into the double-digits.
While Disney paused its dividend payments when the pandemic hit, McDonald’s is still paying one.
Today, it has a 2.2% dividend yield. By comparison, the average yield on the S&P 500 is 1.7%. That means McDonald’s pays about 30% more than the average S&P 500 stock.
But that 2.2% yield is only one half of the story. Today, McDonald’s annual payout is $5.52 per share.
Now here’s where it gets really exciting.
In 2009, I bought shares at $55. So my “yield on (original) cost” is just over 10%. That’s not a typo. I’m making 10% per year on my McDonald’s stock.
I’d have to take enormous risks to secure a 10% yield in today’s market. Yet, McDonald’s – one of the most conservative companies in the world – pays me 10% annually.
Adding it up, I’ve already gotten back more than half of my original cost through dividends alone. In another 10 years, I’ll get the equivalent of my initial stake… while still owning a stock that’s already gone up 5-fold from my cost basis.
By the time I retire, my annual dividend payments may even exceed my initial purchase price every year.
In other words, I could see a yield on cost over 100%.
That’s the power of dividend investing when you focus on great companies with a history of growing payouts.
You Must Strike When Others Are Fearful
These types of opportunities only come along a few times in the course of an investment lifetime. And right now is one of those times.
Let me explain…
The current bear market reminds me of what I experienced in 2008.
After reaching record highs in 2021, the S&P 500 and the Nasdaq are down 13.5% and 23.6%, respectively.
And like the Great Financial Crisis, this sell-off has been particularly brutal for retirement accounts.
According to the Center for Retirement Research at Boston College, the recent sell-off has erased nearly $3 trillion from U.S. retirement accounts.
That’s more than the GDPs (gross domestic products) of India, the United Kingdom, and France, the world’s 5th, 6th, and 7th largest economies, respectively.
If you’re one of those Americans whose seen their retirement account bleed out, then you need to consider buying blue-chip stocks on this pullback.
As Teeka wrote last month, we’re in a New Reality of Money… where obscene money-printing and inflation have twisted the normal rules of money.
And in this New Reality, you need to rethink your ideas about investing and saving for retirement.
In this environment of fear, you need to focus on income-generating opportunities. And some of the best opportunities to find income in the stock market are with blue-chip dividend payers.
Thanks to the current volatility, we’re seeing great prices on dividend stocks. Now, it might not “feel” like a great time to buy… But just like in 2008, that’s often the best time to be a buyer.
Now is the time to put money into high quality companies because they are offering dividend yields we haven’t seen in years.
And in tomorrow’s Daily, I’ll show you the four criteria I look for. So stay tuned.
Analyst, Palm Beach Daily