The market crash of 2020 has seen a significant drop in the share price for many firms. The FTSE 100 is down over 30% from levels of 7,550 points seen only a month or so ago. But given the sell-off, you will see a variety of great content and ideas for buying stocks at the moment.
This makes sense in my opinion, as buying low is one half of the phrase ‘buy low and sell high’. So from that point of view, buying into stocks in the FTSE 100 index. which is at levels not seen since 2011, ticks that box.
But when looking to invest, people usually fall into two camps. Some invest for the dividend payouts, looking to gain income. Others are happy not to be paid a dividend, but invest in stocks which offer the strongest growth prospects. Which makes most sense at the moment?
Argument for income
Regardless of how good an investor you are, no one can call the bottom of the crash. Some of the stocks you have your eye on may look cheap, but the price could fall even further. From this angle, investing for income could be the safer option. This essentially means that you would buy stocks that have a high dividend yield.
Currently, some household names are offering high dividend yields. For example, Lloyds Banking Group has a yield of 10.5% and BT Group has a yield of 12.2%.
Because we do not know how long this crash could go on, investing in dividend paying stocks could give you much needed income. This income can be used either to offset capital losses, or simply to bank and save until you find another investment opportunity.
Argument for growth
The case for investing now in growth is that various firms look fundamentally oversold. This is when comparing their long-term financial ratios and looking at the strength of their balance sheets. Another variable we can add in is the implied versus actual impact from the coronavirus. This is hard to call, but if you are confident that the sector you are looking at is not hugely at risk from the virus disruption, then it is an added bonus.
Given the oversold conditions, investing more in growth-oriented firms could offer large returns. Should we see a rebound in the stock market over the next 6–12 months, and then a continuation into the longer term, the profit from investing now could be substantial.
As an example, if you invested into Vodafone at current levels and it retraced back to levels seen just two months ago, this would be a return of almost 28%.
A bit of both?
If you are smart, then you can look to get the best of both worlds. This is what I would be doing myself. Picking firms with generous but not huge dividend payouts which have seen a large but not calamitous share price drop is the sweet spot. This way, you protect yourself from a further price drop via the income, but also have the opportunity to gain from a rebound.
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Jonathan Smith owns shares in Lloyds Banking Group and BT Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.