What happens when the stock market enters a period of volatility, like we have seen over recent weeks?
One answer is: panic. Some investors worry about what such volatility means and where it might lead. But that is only one part of the story. Some calm investors who take a long-term approach to investing seize the opportunities that stock market volatility can present.
Why? Doing so can mean they buy great shares at bargain prices. Potentially, that could help someone retire years early.
Great shares aren’t immune to market turbulence
Perhaps I ought to start by explaining that last bit. Stock market volatility can push a share down to a point where its price is much cheaper than it was just weeks before. As dividend yield is a function of the dividend a company pays and what you pay for its shares, that can mean its yield is pushed up.
To illustrate, I will use US oil major ExxonMobil (NYSE: XOM). This venerable company has a simply stellar dividend record, having grown its dividend per share annually for decades. Indeed, it kept doing so during the pandemic when UK rivals such as Shell took the opportunity to cut theirs.
At the moment, ExxonMobil’s yield is 2.8%. That may seem uninspiring by British standards. It is slightly below the current FTSE 100 yield of 3% and also below Shell’s yield of 3.3%.
But the ExxonMobil share price has gone up 357% since its 2020 low when pandemic era fears about reduced oil consumption punished it.
So somebody who invested then would now be sitting on a tremendous paper (or actual) gain.
But here is the key point when it comes to retiring early: having bought at the lower price, their current yield would not be the 2.8% ExxonMobil offers today. It would be north of 12%.
How could a downturn help someone retire early?
For a blue-chip stock with ExxonMobil’s assets, that sort of yield is the stuff of dreams. Investing at a point when the yield is at such elevated levels could potentially help someone hit their financial goals for retirement years early.
That presumes, of course, the dividend is maintained. So far, in the case of ExxonMobil, it has been (indeed, it has kept growing). But that is never guaranteed.
Yes, ExxonMobil has large reserves, a proven business model and extensive sales channels worldwide. But so does Shell – and, unlike ExxonMobil, it cut its payout in 2020.
Using market turbulence to your advantage
Exxon (like Shell) is currently riding high thanks to elevated oil prices. But there is a risk that once the oil price falls – as it is bound to do sooner or later – that will hurt ExxonMobil’s profitability and its share price.
Making the call between risk and reward as an investor can be easier when there’s a sufficiently comfortable margin of safety. A period of volatility that dramatically marks down the share prices of some great companies can help to improve that risk/reward ratio.
But such periods can be short-lived. That is why I am spending time now making a list of quality blue-chip companies whose shares I would like to own – if I get the chance to buy them at a bargain price.
