Buy low, earn high

Beaten-down shares can offer tasty long-term incomes.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

‘Buy low; sell high’. That’s the old stock market adage, and it’s what many stock market investors aspire to.
 
But – crucially – not all stock market investors. Because many investors – including me – aim to be ‘long-term buy-and-hold’ investors.
 
And not just because they’re following Warren Buffett’s maxim about the ideal holding period for a first-class business being forever, but because they are income investors, holding a share for the regular – and growing – dividends that it throws off.

Put another way, provided that a share meets my income criteria, I have very little interest in selling it – even if a rising share price offers an opportunity to switch the capital into a higher-yielding share.

Low share price = high yield

But if the ‘sell high’ part of that old adage isn’t applicable, the ‘buy low’ part most definitely is.
 
And that’s because the lower the price that I pay for a given share, the higher the yield.
 
In other words, if a share costs 100p and offers a 5p dividend, then that’s a 5% yield. If the share price drops to 50p, but the dividend remains unchanged, then that’s a 10% yield.
 
And the yield offered by individual shares does move around considerably over time. Moreover, so too does the yield offered by the market as a whole.
 
Put another way, there are times when the market offers income investors an opportunity to lock in a higher income, and times when it offers a lower income.

Surprisingly variable

I’ve written before about how I took advantage of the market’s fall in January and February to make some purchases when the FTSE 100 fell to 5,500 or so (for reference, it’s now above 7,000).

Take a look at the chart below, which shows the yield of the FTSE 100 over the last five years. As we see, at the market’s nadir, the yield on offer – the yield you’d have got from a bog-standard low-cost index tracker, for instance – was almost 4.4%. Today, it’s 3.6%.
 
Put another way, that’s almost 20% less income in a little over six months. Over time, that adds up to an awful lot less income – yet bizarrely, today’s higher FTSE level indicates that investors are happier to buy today than they were back then.

ft1

Source: The Financial Times

And, of course, the yield on offer from individual shares was much, much higher. I bought engineering firm Weir, for instance, at 777p – a yield of 5.5%. At today’s price of 1,765p, that yield has fallen to 2.4%.

Steadily climbing ‘bought yields’

And this is the income investor’s strategy, of course: to take advantage of market falls to buy temporarily high-yielding decent businesses.
 
Better still, as those companies grow and prosper, that initial high yield in ‘bought cost’ terms continues to rise as the dividend increases.

In ‘bought cost’ terms, for instance, my stake in AstraZeneca, purchased in 2011, is now yielding 6.9%. BAE Systems, bought in 2010, 6.6%. GlaxoSmithKline, bought in 2007, 6.3%. And so on, and so on.
 
Moreover, as I’ve said, each year that the dividend rises, those initial ‘bought cost’ yields continue to climb.

Mental gear shift

What to do about this? It’s the old familiar quandary: those points at which yield is highest are precisely those same points where fear, uncertainty and doubt are also at their peak.
 
Nevertheless, I think there are some practical steps many investors can take:

  • Try thinking in yield terms, and not just share price, to help you focus on income rather than capital.
  • Monitor yield trends, as in the chart above, and develop a sense of the market’s overall yield.
  • Learn to compare an individual share’s yield with the market average, and ask yourself why it is higher or lower.
  • Consider holding back investment funds at times of low yields, in order to be able to invest more at times of higher yield.

It’s high for a reason

Even so, always remember that – unlike a bond – a share’s dividend may be cut or suspended at any time.
 
A month ago, for instance, I bought into insurance group Legal & General on a yield of 7.3%, a level at which the share price indicates that the market has some post-Brexit concerns about the company.
 
Are those concerns justified? We’ll have to see. But at 7.3%, that was a risk that I was prepared to take.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Malcolm owns shares in Weir, AstraZeneca, BAE Systems, GlaxoSmithKline and Legal & General.  The Motley Fool owns shares in GlaxoSmithKline, and has recommended shares in Weir and AstraZeneca. 

More on Investing Articles

Investing Articles

2 FTSE 100 stocks hedge funds have been buying

A number of investors have been seeing opportunities in FTSE 100 shares recently. And Stephen Wright thinks two in particular…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Would it be pure madness to pile into the S&P 500?

The S&P 500 is currently in the midst of a skyrocketing bull market, but valuations are stretched. Is there danger…

Read more »

Investing Articles

If I’d put £20k into the FTSE 250 1 year ago, here’s what I’d have today!

The FTSE 250 has outperformed the bigger FTSE 100 over the last year. Roland Head highlights a mid-cap share to…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Growth Shares

The Scottish Mortgage share price is smashing the FTSE 100 again

Year to date, the Scottish Mortgage share price has risen far more than the Footsie has. Edward Sheldon expects this…

Read more »

Investing Articles

As H1 results lift the Land Securities share price, should I buy?

An improving full-year outlook could give the Land Securities share price a boost. But economic pressures on REITs are still…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

How much are Rolls-Royce shares really worth as we approach 2025?

After starting the year at 300p, Rolls-Royce shares have climbed to 540p. But are they really worth that much? Edward…

Read more »

Investing Articles

Despite rocketing 33% this hidden FTSE 100 gem is still dirt cheap with a P/E under 5!

Harvey Jones has been tracking this under -the-radar FTSE 100 growth stock for some time. He thinks it looks a…

Read more »

Dividend Shares

How I could earn a juicy second income starting with just £250

Jon Smith explains how investing a regular amount each month in dividend stocks with above average yields can build a…

Read more »