When share prices fall, dividend yields go up. And that can be a great opportunity to try and start earning a second income by investing in the stock market.
It’s always important to keep these things in context. But there are a few cases where I think stocks are genuinely trading at unusually low levels and worth serious consideration.
Dividends
A sharp move in the stock market – either a correction or a crash – can suddenly make shares much more attractive. Investors however, need to keep an eye on the bigger picture.
Earlier this month, the S&P 500 fell 12% in a week. But this didn’t particularly put the index back to historically low levels – it was still higher than it was at the start of 2024.
In terms of dividends, Goldman Sachs is a good illustration of this. The stock fell almost 18% during the recent stock market turbulence, but the dividend yield only reached 2.5%.
That’s a dramatic fall, but it didn’t obviously mark an unusually good time to buy for investors. The stock traded with a higher dividend yield in 2022 and 2023.
It’s very important to distinguish stocks that are just cheaper than they were a week ago from ones that are rare opportunities. And a look at the longer-term picture is key to this.
One FTSE 100 name stands out to me to consider at the moment. The firm has an outstanding record of annual dividend increases and the current yield is the highest it’s been in over 10 years.
Croda International
The stock is Croda International (LSE:CRDA), the speciality chemicals company which has increased its dividend per share each year for the last 34 years.
This is especially impressive given the cyclical nature of the markets the business sells into. In other words, the firm has managed to turn fluctuating demand into consistent dividend growth.
Croda’s current situation is interesting – in 2024, the firm distributed more in dividends than it generated in free cash. Over the long term, that obviously isn’t sustainable and this is a risk.
In the short term, the company’s in a good position to bridge the shortfall. Long-term debt has been falling since 2020, which should create more financial flexibility.
More importantly, the company’s key strengths – the patents and regulatory requirements that protect its products – are still intact. And this is what I think will matter over the long term.
I therefore think income investors should pay close attention to Croda International shares. A dividend yield above 4% is also an opportunity they haven’t had in the last decade.
Buying shares
I think this could be a great time for income investors to consider buying shares. But not every stock is an unusual bargain just because it’s had a sudden drop.
Investors need to distinguish stocks that are outstanding opportunities from ones that are just cheaper than they were a few days ago. And the way to do this is to look at the bigger picture.
Croda International’s facing some challenges at the moment. But if it can navigate these, it could be a terrific source of passive income over the long term, especially at today’s prices.
