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Owning shares in FTSE 100 companies can be a great way of earning passive income. But finding businesses that can return cash to shareholders is only part of an investor’s job.
The other part of the equation is finding ways to buy them when they offer good enough returns. And a falling stock market can be a great opportunity to do this.
Discounted dividends
Legal & General (LSE:LGEN) is a stock that is popular with income investors – and justifiably so. It often trades at prices that mean there’s a high dividend yield on offer.
Right now, the dividend yield is around 9.25%, but during the recent volatility, investors were able to buy the stock with a 10% yield. And the difference can be significant over time.
Compounding a £10,000 investment at 9.25% over 30 years results in £142,116. But the result of achieving a 10% annual return is £174,494 – over £30,000 more.
From a passive income perspective, that’s the difference between receiving £12,032 per year and £15,863. Over time, taking advantage of unusually good opportunities can really pay off.
Caution
Investors, however, need to be careful when share prices are falling. The stock market often overreacts to unexpected developments, but it rarely does things for no reason.
In the case of Legal & General, falling share prices could actually be bad news for the underlying business. There are a couple of important things to consider here.
First, the firm has solvency ratios to maintain. And the value of its investments falling might mean it has to hold on to more of its cash, reducing the amount available for dividends.
Second, demand for its investment products might fall as customers become more nervous with share prices going down. Whether or not it’s the right thing to do, it does tend to happen.
Opportunities
It might be the case that a 10% dividend yield is enough to offset these risks. But I find this hard to assess accurately given the uncertainty around share prices at the moment.
While I’m certain investors who bought the stock at £2.15 won’t do worse than the ones who are buying it at £2.31, I’m not minded to jump in myself. I am, however, looking elsewhere.
Shares in Games Workshop (LSE:GAW) have also had a volatile few days, with uncertainty over trade tariffs causing the stock to fall 16% before recovering 11%. Nonetheless, I’m interested.
The company might have to increase its prices as a result of tariffs and this is a risk. But very strong gross margins mean it’s unlikely to have to raise prices by much to offset the costs.
Buying the dip
A volatile stock market can give investors the chance to buy stocks with unusually high dividend yields. And over time, the result of taking these opportunities can be huge.
Being greedy when others are fearful can be a winning strategy, but investors need to tread carefully. Sometimes there can be real impacts on companies that need to be considered.
I’m staying away from Legal & General shares at the moment for this reason. But I’m actively looking for opportunities to add to my Games Workshop as the share price fluctuates.
