Buying in the Storm: How Bear Markets Lead to Higher Dividends and Returns

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Almost everyone knows that tariffs and trade wars have sent global markets spiraling, with the Dow down 17% and the S&P 500 down 20% from their highs, based on our recording date. While technically that implies we have entered a bear market, it also means better prices for long-term cash flow. It is human nature to get nervous when markets seem to be on the brink of panic, but dividend growth investors should see times like these as a gift. 

In this episode, Greg tackles the tough headlines and sinking sentiment in today’s markets. As recession fears grow and the market experiences significant volatility, Greg explains why focusing on sustainable cash flow and quality companies provides stability for long-term investors. From investor psychology to long-term GDP trends, Greg discusses how disciplined dividend investing turns market panic into wealth creation. Later, he highlights our recent purchase of Union Pacific ($UNP) as proof of concept. 

EDIT: In the episode, Greg mentions that paying $30 for $1 of earnings is about a 2.5% earnings yield. This comment was made in error; the correct number is a 3.33% earnings yield.

Topics Covered: 

• [01:00] Why focusing on cash flow provides clarity in a chaotic market
• [02:48] First quarter portfolio performance and the power of staying invested
• [05:00] Reframing a bear market: buying cash flow at a discount
• [06:55] How GDP and earnings trends support long-term optimism
• [10:17] Why market corrections test your investment mindset
• [11:50] Comparing stock ownership to rental property — and why we forget it's the same
• [16:33] Real numbers that contradict the media narrative (household debt, corporate cash, etc.)
• [24:52] New position: Why we bought Union Pacific and what makes it a dividend powerhouse
• [28:40] The case for quality, patience, and diversification during uncertainty
• [31:33] Index funds, dividend ETFs, and staying positioned for the rebound
• [34:01] The most dangerous investing phrase: "It's different this time"

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Transcript

[00:00:11] Greg Denewiler: This is Greg Denewiler, and you are listening to another episode of the Dividend Mailbox, a monthly podcast about dividend growth. Our goal is to stuff your mailbox full of dividend checks. When they grow over time, a funny thing happens: you create wealth. 

Welcome to episode 46 of The Dividend Mailbox. And of course, in this episode, we have to start with talking about what's going on. It's on virtually everyone's mind to some degree or another. Whether it's directly related to your investments—are we going into a recession? What is going to happen in the world? Everybody is looking for opinions as far as what's going on and some different perspectives, and we will have a few of our own. This is when it feels really good that we focus on quality and really look at cash flow. Because in this kind of environment, that's what gives you the comfort to just wait it out or to acquire things when the headlines look like the world is not a very happy place right now. So I hope you enjoy this episode and get a few takeaways from it. 

This is being recorded on April 8th. It has been an extremely rough week from the standpoint of what the markets have done. So, the first place where I would like to start is if you haven't picked up much of anything from these episodes, and if you've listened to more than just a few of them, you should be well aware that our main concern and our main focus is on cash flow. And when you get into an environment like this, you really get tested, depending on what kind of a mindset you have towards investing. And part of it may also be just how old you are or what your experiences have been. What you soon learn is that if you're not confident in what you own, the headlines can overwhelm you, and in this case, cash flow and a dividend stream can really make a big difference. 

As this market decline has evolved, we did the first quarter portfolio reviews—going through, looking at the performance of all of our accounts, and the average account was up slightly. The, what I call the model portfolio, which is a live portfolio, through the end of March, was actually up 2.1% in the first quarter. We had pretty dramatic outperformance because the S&P was down 4.6%. But another thing that you should have picked up from our podcast is that one quarter, one month, does not make a long-term strategy. We are catching up from what we lagged last year. We have a position in Microsoft, but it's not in our, what we call our core portfolio, the model. So, we did lag because we didn't have the technology exposure, but now that's coming back to help us. 

And not to overplay this, but it's really a huge piece of what we're all about. For 2024, our core portfolio income was up about 8.5% versus the S&P 500’s dividend being up 6.5%. On an income basis, we were ahead by over 200 basis points. And now as we go into this year, we're already set up to have a higher income number just based on the dividend bumps that we've had towards the end of last year, which go into the full year this year, and a few that we've already had, and then we still have a somewhat significant position in money market. We're going to get into what just happened there, here in a few minutes. 

First, let's consider that as we look at what's happened in the marketplace, which these numbers are moving fast, and it's really the overall big picture that matters. Recently, the Dow hit a high of just a little over 45,000, and the S&P 500 was over 6,100. So as of our recording date, the Dow is down 17% from its high. The S&P 500 is down by basically 20%. For what it's worth, that technically is a bear market down 20%, but I always have to step back and say, okay, we're in a bear market. Well, the first response should be: so? That just means prices are lower. That just means you can buy cash flow now at a much more attractive level. That just means long-term returns just got better. Now, that doesn't mean that the returns are going to be better for the next 12 months. Maybe it takes two years, who knows? But I can tell you long term, when you're paying 20% less for cash flow, and if that cash flow grows over time, it's just means that your returns are going to be higher. And as Shelby Collum Davis has been known to have said: “You make most of your money in a bear market, you just don't realize it at the time.” And what we try to focus on, or what we do focus on, is trying to make sure as much as we can, make sure that we're in sustainable cashflow growing businesses. Now, another caveat is that cash flow can be interrupted for a quarter or six months, or a year, but we're talking about long-term returns here. That's everything that we try to do. We've talked about our 10-year model in the past. Well, if you continue to get 7% dividend growth, that means just in the S&P 500 alone, with its dividend up to 1.5%, now, you're up to a 3% yield there. With compounding over 10 years— just kind of a back of the envelope—I mean, that right there is going to give you a 25-30% return. Even if prices don't move, you have a return on your investment. 

Another thing that we really try to focus on—it's been a while since we've used this analogy, but now it really starts to have more importance. GDP long term grows at about 5-6%. That includes inflation. It has dips, and if you want a good exercise, that's well worth the time, go back and look at how long GDP was down in 2008-2009. How long it was down in 2002. How long GDP dipped before it recovered in 2020. Go back 120 years, and what you're going to find out is that the economy grows. GDP recovers really remarkably pretty fast, and usually at the most it takes 24 months. Usually, it is much shorter than that, and it continues to grow. Earnings can be more volatile. It can take them longer. But if the economy grows, earnings sooner or later follow. Depending on your definition of later, it's usually at most a year or two. So right now, the fact that the market is down and GDP— it's yet to be determined whether we're in even in a recession right now. All the volatility in the marketplace is all about anticipation, which is what the market does. I mean, that's basically its job. It's virtually never valuing anything today. It's valuing something of what they think it's going to be tomorrow. So right now, this is the time when you really should be starting to look at, okay, where can I buy cashflow and where can I buy it at a reasonable price? What's even better is when you can buy it at what you think is a below fair value price or a price that the market has depressed the outlook because of uncertainty, so you get to buy it cheap. 

So with that, we're going to get into a little bit about, okay, kind of where are we right now? The S&P 500 earned $233 last year in earnings. With the current value of the S&P 500, around 4,900, a little bit below 5,000, we are currently at a PE of 21x, and that includes all the heavily weighted high-tech stuff. So it's pretty easy to start to argue that we're at a decent level now. We're at a long-term average, where the market long term can now get back to its growth of 7-10% a year going forward. When a market is expensive, basically all you're doing is if a company earns $1 and you pay $20 for it, it's a 5% earnings yield. You pay $30 for it, it's about a 3.33% earnings yield. So what that basically comes down to is your higher returns are going to come when you pay less for an asset, given that over time, you've got the same earnings. It's really kind of a basic concept. 

So the estimates for this year are $263. It's pretty obvious those are going to come down some, maybe a lot, who knows? But here's another analogy you really need to step back and think about. So what if earnings go down to $175? What if they go down to $150? At this point, the best thing you can do is focus on the long-term reversion to the mean because, in the end, earnings are going to go higher. And if they don't or if you question whether they will, I have no idea why you're even listening to this podcast right now because you should be in Montana digging a big hole where you're going to put your house. If you start thinking that the economy is not going to grow anymore because of all the problems that we have— this is kind of true in life and just the world. Everything that exists on some level is either growing or dying. It's really the same concept in the economy. Companies are either growing or they're in some form of decline long term. I mean, that's just the way it works. So if you really think things are going to get worse, you have a much bigger problem to worry about. And one of my reasons why I have such faith in a growing economy over time is the average person, probably 99% of the population out there, wants a lifestyle that is at least as good, if not better, in their future. Never underestimate what a government or the population is willing to do to make sure their lifestyle is intact. 

One thing that we have mentioned to clients in our monthly market letter and in some conversations is: really look at market volatility the same way you would look at rental real estate. If you have a rental property, and just for simplicity's sake, let's just say that the property's worth a million dollars. You're generating 6% rent on it, so you're generating $60,000 a year, and your tenant moves out. The property is sitting there vacant for, let's just say six months. So now you have a track record of six months where you have not received any rent and you decide, “You know, I don't really want to be in the rental business anymore.” Whether it's because you just don't want to hassle with it, or maybe because things are on sale, you think, you know what? I like this whole dividend growth strategy better. So your rent has been cut in half for the year, and the house is roughly valued at a million dollars. Well, if someone comes in and talks to you about buying your rental property, do you think they're going to go, “You know, that property only generated $30,000 of rent in the last 12 months, so therefore I want a 6% yield on my money. I'm only going to pay you $500,000 for that house or for that rental property.” Are you going to say, “You know what, that's fair, you're absolutely right. My income's half, so here's the keys. It's all yours for 500,000.” Well, I have a feeling that if you do that, you've been smoking something, because that's not how markets work. That property is worth more than $500,000. What you're going to do is you're going to say, “You know, this property's been vacant, but there are a lot of tenants out there. The market ebbs and flows. People move around, and I'm quite sure that we're going to find another tenant. This property will be right back to earning $60,000 a year in rental income.” 

So I find it really fascinating when people— if someone has a piece of real estate that they're renting out, and there is some vacancy for whether it's a month or two or three months—it's really amazing how they look at that completely different and they tend to normalize it, and they know that they're going to be able to rent the property out again. Unless you're just in a real liquidity squeeze and you have to have money, you don't sit there and sell an asset that has a long-term potential for earnings. You don't just give it away. But in the stock market, it just seems like people forget that these are companies. GDP, the economy recovers, and if you've got a reasonably high-quality company, even if earnings have come down a little bit because of a recession, they will revert back to the mean, which long term is growing at about 7% a year. I hate to say it, it's not surprising. People just treat stocks differently. They have this perception because they can buy or sell instantaneously, “I'll sell it and just wait till things get a little bit better.” Well, do you sell your rental property and turn around three months later and try and buy it back? You would look at that really as ludicrous. But when you look at a share of the S&P 500, or Chevron, or Union Pacific or you know, go on down the list, General dynamics, people just view them differently. They view them more as chips instead of assets. But overall, the market grows earnings faster than your rental income is growing over time, so why wouldn't you treat that as a more valuable asset on one level? And another challenge that seems to come up, and everybody faces this on one level or another, because assets are priced every day in the stock market, you know, every minute—it's a highly liquid market that they just don't seem to understand that when an asset starts to go down in value, a lot of times earnings don't even dip. People are just afraid to buy, but in the end, it's who cares whether you buy it, if it's down 20%, whether it goes down another 10%. If you like the asset and you think it's reasonably priced, you should be extremely happy that you were able to buy it cheaper, and just try to ignore the fact that you're never going to pick the bottom. 

So I'm going to go a little bit into now, okay, so we have tariffs, and you're seeing headlines that the world stage has changed, our standing in the world has changed. Countries may not be as willing to trade with us anymore. Well, here's my answer to that. First of all, I don't know how long this is going to take to work out. I have my own theory, and I will tell you right now, the great thing about markets is they force a political hand relatively quickly because nobody wants to be in charge or have a depression attached to their name. No matter what some of these conspiracy theories may suggest, there are checks and balances. We've got Congress, the president, the Supreme Court, and then we have the market. You're already seeing a little bit of a potential movement in Congress to maybe step these tariffs back, and the markets also have a vote. They force hands because the general public, as they begin to think that their lifestyle is in jeopardy, all of a sudden the drum beat gets much, much louder for things to change. 

Just my own impression, and I have beyond just a guess on this because one of the employees here is from China. And I can tell you that as China becomes more and more of a middle class, that population, just like all other populations, do not want to go backwards. So we may be in a trade war at the moment, and it's who keeps playing the higher card right now? Not a huge fan of that. We'll see how it works out, but just like the US doesn't want to go into a depression, no government wants to send their economy into a depression, and they really don't even want to experience a recession. Now, back in the seventies when we had really high inflation, money market funds were up over 15%. They knew that was probably going to put the economy in a recession to control inflation. But unless there's a really strong why, governments just don't want to do that. Even though China is a communist country, they have tasted middle class, they have tasted wealth. So, in time, and I don't even think it takes that long, you've got a pretty high motivation for all of these countries to come in and resolve this. 

The one thing you can be guaranteed of, it's not going to get resolved the way you think it will. It'll be different in some manner, but in the end, we will move on. 

As we go through what's happening right now, another big thing that really gets tiresome is you see a lot of headlines, you see a lot of statements, but there are virtually never numbers behind them, or they're just numbers that are mostly made up. And I'm going to give you a few numbers right now. First of all, going into this situation, we’re actually as a whole, as a country, in decent shape with one exception, and that's the public debt situation. Everybody knows about that and that supposedly is part of what's behind all this. But here's a fascinating number that I bet you haven't heard here in the last few weeks: US household debt to GDP is at 72%. It's at a 20-year low. That means that on average, US households are in the best financial shape they've been in in 20 years. And in 2008 we were at a hundred percent, so households had more debt compared to where the economy was. 

Corporate cash: our public finances may not be in very good shape, but fortunately, corporate cash right now is at $4 trillion. So corporations have a lot of liquidity. They're going to be able to handle a shock to the system. One thing I think you're going to see relatively soon is because of corporate cash levels, you're probably going to start to see more buybacks. If they're buying their stock at a reasonable price—which a lot of things have come down—when a company buys its shares back, especially when they're paying less for it, it means that your ownership percentage just increases by a small amount, but over time, if they buy 10% back, it just means that your stake went up by 10%. Your dividend, potentially, if they pay the same dollar amount, goes up by 10%, and earnings go up by 10%. It's a great long-term addition to returns to help the market continue to grow, even if stock prices don't move. 

But here's something that I find kind of interesting. You have to be really, really careful that these people are bringing real numbers to the table and you hear— at least I've heard a lot of references towards, “Well, tariffs are a big reason why we had the 1929 depression. Well, there's one problem with that theory. Number one, if you look it up—I suggest trust, but verify, do a little research for yourself—the stock market took the big hit in October of 1929, that’s when it really started down in a serious way. But the recession actually started in the summer of 1929. In late 1929, we had actually started to enter the depression, and guess when the tariffs were enacted? It was in June of 1930. So it's kind of hard to think that tariffs caused something when they weren't even there yet. We can argue that, all right, the tariffs did likely prolong and potentially make the depression worse, but they didn't start it. 

So finally, I will just throw out investor bullishness sentiment is at 21%, which means virtually everybody is negative right now. That is almost as low as we've been for the last 20 years. It's been slightly lower down to about 17, I think, at the worst case, but we don't even know what the current update of that number is because this number is about five days old, so it's quite likely going to be lower than where it is now. Last year, percent bullish sentiment was at 50%. The long-term average is roughly around 35% going back 5, 10, 20 years. The 25-year high was back on January 6th, 2000, it got up to 75%. Well, that was a time when there weren't too many people left to buy, and guess what? We started into a 50% downside correction. Well, the exact reverse of this, if you just look at the long-term chart. Bullish sentiment, when you're down around 20%, that is not the time you want to be selling. 

Another fear gauge that's easy to look up, just look up CNN Fear Gauge. I believe it's seven indicators that they use, and it's from zero to 100.100 being, everybody thinks life is good, life is never going to get worse. And if you get to one, then that means basically the world is coming to an end and we all need to buy hard hats and start going out looking for carrots and mushrooms in the wilderness, because that's all you're going to have to eat. Well, right now, that fear gauge is at four. It pretty much cannot get worse. It can stay at four for a day, maybe for a week. I don't know. The point is, these are situations where you're able to start buying stuff. 

So it's been a really long-winded kind of semi-rant here. The good news for us is we actually took on another position. It's one that we did a very extensive podcast on over a year ago, and we did a report on it, and it's actually on our website, so if you want to go look, it's there. We had a target to buy the stock at $210. Just a couple of days ago, Union Pacific went below $210. The stock is down from $258, so we have started to accumulate it. Right now, we're probably at about a third, and we will continue to buy it. I would like to have it be a full position relatively soon, especially if it goes below $200, which could be tomorrow or may never, but at least we do have a decent position in it. In the past, we mentioned that we bought a very small piece of it when it dipped below $230, but now we're starting to actually, you know what I would call, own it. 

I'm not going to go into the story too deep, but the great thing about this story is that few companies can you pick where I don't care how bad this economy gets, we're still going to have railroads. That doesn't mean railroads can't go bankrupt, but it is not in anyone's best interest. I doubt that that's even close to being in the cards right now. 

It has a dividend yield of 2.6%. It's kind of right in our sweet spot. Would've preferred it to be slightly higher. It currently has a 50% payout, meaning earnings are about double what the dividend rate is. It has over 10% dividend growth. In the last 10 years, earnings have grown from $5.75 to $11, they basically have doubled. So that's a great way to keep being able to maintain paying a dividend and growing it. They bought shares back. 10 years ago, they had 883 million shares out. Right now, they have roughly 600 million. I wouldn't be surprised if they start buying a few more shares back, getting a little bit more aggressive. And railroads as a whole are great long-term investments. They beat the S&P 500 when you go out more than 20 years, and then they tend to hold up a little bit more in down markets. This one… we're in a little different ball game right now because there's so much volatility tied to headlines. 

We've talked about our simple little 10-year model about what dividends have to do for us to get a 100% total return in the next decade. So if we have 7% dividend growth, which is below the 10% in the last decade, the dividend will get up to $9.85 if the stock yields 2.5%, which is basically where it is right now, it's a 126% total return. That's without any benefit to compounding. If the yield has actually increased—which means basically the market has gotten cheaper on one level—if it has a dividend yield in 10 years of 2.9%, but the dividend has still grown to $9.85, then you're still at 100% percent total return based on the fact that the dividend has doubled and that carries the stock price up over time.It really has everything in place as far as what we like to see for long-term growth. 

So we finally got a chance to really start moving into Union Pacific. This just gets back to a great mindset. It took this kind of a market hit to get us to a point where we could buy it. It did take a year before we were able to step into it, but patience pays off. And if it doesn't, there are plenty of other ideas out there at some point that we'll give you the opportunity to buy them. There's other things that are really starting to pop up now, which is the good side to a market that is running in fear right now. It gives you a chance to buy cash flow. 

Anything's possible. If we end up being down 50% for a market correction, which is what's happened in the last 25 years, twice, it's not abnormal, then yeah, you'll be able to buy more Union Pacific down the road, but can you think a few companies that will come out of it and still be in decent shape if you have sustainable cash flow? 

Good quality companies will thrive in this kind of a scenario because it gives them a chance to either increase market share, gives them a chance to buy back their stock reasonably. It can also give them a chance to make acquisitions. Usually, we badmouth acquisitions because companies usually pay too much. But companies that have discipline and know how to manage an acquisition efficiently, if prices get cheap enough, it actually creates a great opportunity if you have liquidity. They just have options to go out there and increase shareholder returns. Our strategy really focuses on quality, and of course, that can always change, but if you start with that hurdle, it definitely helps you. So as you go into a recession, it just makes it a much higher likelihood that what you own is going to come through it intact. You have to figure too, are you trying to hit a grand slam here or a double or a triple without too much effort? The stuff that's more cyclical can come back fast, but the quality stuff sticks around, and if you're wrong and we end up in a 50% correction, it sure feels good owning quality as opposed to something that, if they have to restructure, you don't get your money back. And hooking your strategy to GDP growth grows earnings over time, which grows the dividend over time. The great thing about focusing on the income growth is that it is a lot less volatile than earnings growth. 

Now, I will throw out a word of caution as you see the market get hit and some stocks really come down, just be a little careful. We did a quick update just a few weeks ago. We hit on William Sonoma. Well, William Sonoma is coming down more in this environment. But again, having rules of what you're willing to pay for something, that is our guide. We mentioned on the Express Mail episode, I really want to see it down to about $105 before we're, we're willing to go back into it. And as we've been starting to spend more money for our clients, especially for accounts that have liquidity and that need more equity exposure, we continue to buy individual companies, but the one thing you want to make sure in this environment is don't try to prove something to yourself. Don't put all your chips on one or two ideas that you think just can't miss because inevitably one of them will, at some point, probably miss. As you accumulate in a market that's selling off. Just make sure you have diversification, and make sure you use indexes if you don't have enough to own a lot of different companies in your portfolio. We've talked about the Dividend Aristocrat fund, which is NOBL and DGRW, which is the Wisdom Tree Dividend Growth Fund. There are a multitude of them out there, and we've even bought a little bit of just the S&P 500. 

The most important thing when a market rebounds, you just want to make sure that you're participating in it. When this market turns, if there is resolution on these tariffs or they get rolled back, or they even are somewhat successful, the market will respond to that. You don't want to be waiting for something to buy. One of the problems a lot of people get into is they think, “Well, you know, when things start to get better, I'll buy.” Well, if there's an announcement at 4:05 pm Eastern time, the market's closed. You literally can have this thing open up 3, 4, 5% the next morning. You have no chance to get in, so be really careful about getting out. Don't be afraid to straddle the fence sometimes. 

So, in conclusion, just a few thoughts. One of them that comes to mind that you hear a lot, either when Nvidia looked like it was basically going to take over the planet, and now you're hearing it especially with these tariffs, it's really known as the four most dangerous words to use in investing: “It's different this time.” 

Historically, it's been proven that it's never totally different, and as you look at how this might get resolved. A great analogy I kind of thought of, uh, a few days ago— because the economy is so complex and there are so many dots to connect, it's almost walking out, looking up at the stars and figuring out, okay, how am I going to connect all these together? It's really impossible to know which ones become important and which ones become less important. You have stuff that comes out of the woodwork that you didn't know was there. And when things start to really turn south, it's human nature, even politically, everybody tries to save their butt and everybody wants to maintain their lifestyle. It's why the Fed cuts rates, it's why they increase the money supply. 

I mean, you know, just focus on getting from point A to point B, and if it's just maintaining your portfolio and not doing anything, that in and of itself is a huge moral victory, because most people don't do that. They sell and they buy back in at a higher price later. 

And another great quote from Peter Lynch, who was a very successful manager at Fidelity a few decades ago, “Far more money has been lost by investors trying to anticipate corrections than lost in the corrections themselves.” So first thing is to make sure that you don't react in this kind of environment. The second thing is to use it to your advantage. And the third thing is that these down markets are what create returns longer term. This is basically how wealth is created. 

If you enjoyed today's podcast, please leave us a review and subscribe. If you would like more information regarding dividend growth or our investment strategy, please visit growmydollar.com. There you will find previous episodes and also our monthly newsletter. If you have any questions or anything to add to today's episode, please email Ethan@growmydollar.com. 

Past performance does not guarantee future results. Every investor should consider whether an investment strategy is right for them and all the risk involved. Stocks, including dividend stocks, are volatile and can lose money. Denewiler Capital Management may or may not have positions in the publicly traded companies mentioned herein.