Bear market creates strategic investment opportunity

Canadian stocks are now in bear market territory. This setback gives you a chance to buy fine companies on the cheap. Follow our advice to invest both safely and profitably.

When stocks fall by 10 to 20 per cent, they’re said to have undergone a ‘correction’. When the drop is more than 20 per cent, a ‘bear market’ has arrived. Canadian stocks are now in a bear market.

Some observers are alarmed by corrections and bear markets. They see these stock market setbacks as disasters. Our view is different; stock market setbacks can create wonderful buying opportunities. To profit, it’s important to buy some stocks cheaply.

If you’re building your portfolio, you should welcome stock market setbacks. That’s because they enable you to buy pieces of fine companies at attractive prices. Only retirees withdrawing from the market are justified in finding market setbacks upsetting.

How to invest safely and profitably

There are, however, several things to keep in mind. First, you must invest in those companies that you’re sure will survive economic and stock market downturns. One way to accomplish this is to focus on high-quality stocks—those that qualify for our ratings of ‘Conservative’ or ‘Very Conservative’.

Second, you should insist on dividends. Then you know that the company is at least doing well enough to mail you cheques. Earning dividends also means you’ll profit regardless of where stock prices go.

Third, focus on ‘dividend aristocrats’. In Canada, that refers to companies that have raised their dividends for at least five years in a row. One advantage is that dividend aristocrats let you keep up with the rising cost of living. That matters for retirees.

Another advantage is that companies with growing dividends eventually attract income-seeking investors. They’re likely to bid up the prices of your shares. If they don’t, your dividend yield will keep climbing.

Another advantage with dividend aristocrats is that a failure to keep raising your dividends is like an ‘early-warning system’. Key stock Loblaw Companies, for instance, stopped raising its dividend when it encountered difficulties several years ago.

Yet another advantage is that they will limit your exposure to the volatile resources sector. Few commodity producers consistently raise their dividends.

Fourth, you should buy some companies that earn significant income abroad. This will soften the blow of a slow Canadian economy. Key stocks that come to mind include Alimentation Couche-Tard (TSX─ATD.B), CAE Inc. (TSX─CAE), CCL Industries (TSX─CCL.B), Gildan Activewear (TSX─GIL), Magna International (TSX─MG), Saputo Inc. (TSX─SAP), Stella-Jones (TSX─SJ) and so on.

Take advantage of this bear market to buy solid stock on the cheap. Capere occasionem!

 

The Investment Reporter, MPL Communications Inc.
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