Stock Market Sell Out: How I Keep Earning Passive Income

I am in charge of my family’s finances. It is not a task I take lightly, as a mistake on my part could leave us on the street. OK, that’s an exaggeration, but it’s the weight I feel, and bear markets don’t lighten the weight. However, I have a playbook that I’ve been living by for years, and market sales is actually a good time for me to continue building my passive income stream. Here’s how I make downturns work for me.

Safety first

I take it upon myself to ensure that my family has the financial means to deal with financial hardship relatively quickly. To that end, I have a graduated Certificate of Deposit (CD) wallet with about six months worth of living expenses in it. One of the six CDs I own ripens every two months and rolls over automatically if I don’t stop that process. Essentially, I always have access to some cash when I really need it, which makes buying stocks less stressful. The key is that this vital safety net is on autopilot. I thought about it once, set it up, and now I never have to think about it again. I just know it’s there.

“Keep it simple” is an essential mantra for me because I’m just not able to juggle too many things at once. I share this because the same logic is also important for my investment approach.

Focus on success

One of the suggestions you will find in Benjamin Graham’s iconic book The intelligent investor is to focus on companies with a long history of success. A quick way to find such companies is to look for names with a long history of annual dividend hikes. Dividend Achievers (10+ years of dividend increases), Dividend Aristocrats (25+ years) and Dividend Kings (50+ years) are all good starting points. From there, you have to do a little digging to find companies that are well managed with modest leverage. Once you have a diversified list of names you like, don’t do anything. Wait a second.

The market is going up and, as we saw in 2022, down. Wait for the stocks you like to come to you. I don’t have a fixed buying point, but I generally only make an addition when the dividend yield of a company I like is trading at the high end of its historical yield range. It suggests that the price is at least cheap compared to historical standards.

During the COVID-19 Pandemic Bear Market, I Bought Real Estate Investment Trust (REIT) Federal Real Estate (FRT 1.67%), which has a run of more than 50 years of annual dividend hikes (it’s the longest run in the REIT space). This REIT has a small retail portfolio that focuses on wealthy regions with large populations. Development and redevelopment are important business competencies. The retail industry was heavily out of favor during the pandemic, but this company has proven many times over that it can withstand adversity and continue to reward dividend investors like me.

During this year’s downturn, meanwhile, I added: Texas Instruments (TXN 1.82%) and Medtronic (MDT 0.83%). Both are higher-dividend growth names with a long history of annual dividend increases that had unique problems, but it took a bear to push them to attractive levels in the end. That said, investments pop up all the time, so I’ve also added: Kellogg (K 0.30%) in between those two bear markets as investors were gloomy about the iconic food supply over company-specific issues, including a manufacturing facility fire and a strike. Kellogg’s dividend has not increased annually, but has steadily increased over time. Remarkably, Kellogg is up about 15% this year as production issues have eased.

Mindless sticking to a plan

Here’s the next big step: I’ve set all those new purchases to dividend reinvestment, just like pretty much all of my stock holdings (and like my CD safety net, really). It’s the ultimate keep-it-simple move for me. Based on my approach, I know that I own companies that place high priority on returning value to shareholders. I’ve selected the dividend names that I think are long-term winners, so I know I have great companies in my diversified portfolio. And I’ve put them on autopilot so I can watch the quarterly dividend checks turn into additional shares of great companies.

During bear markets, I actually find it reassuring to see myself adding even more to a list of stocks I own. However, remember that these are dividend stocks, so any stock I add actually increases the passive income I generate. It’s a slow process, but my dividend income has been steadily increasing for years without having to do much. Simple is good; autopilot is even better. When I retire, I plan to collect those dividend checks to supplement my Social Security benefits.

Slow and steady

I’d be lying if I said I didn’t pay close attention to my portfolio. I constantly follow the news on my 20 or so stocks and listen to most earnings conference calls. If something fundamental changes, I will reconsider my commitment to a stock. But what I don’t do is constantly fret over the price of my stocks going up and down in the ever volatile stock market. I’ve basically taken that out of my process by focusing on dividends, dividend yield, dividend reinvestment, and my steadily growing stream of passive income. In my investing world, stock market sell-offs are just another opportunity to invest and reinvest in great dividend stocks.

Reuben Gregg Brewer has positions in Federal Realty Investment Trust, Kellogg, Medtronic and Texas Instruments. The Motley Fool holds positions in and recommends Texas Instruments. The Motley Fool has a disclosure policy.

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