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Passive Income Investors: How’s Your “Bear” Market?


Passive income investors, are you feeling under the weather lately because of the market downturn? You’re not the only one. Be careful of your investment portfolio management, though, because investors tend to buy and sell at the wrong time.

Thankfully, passive income investors have it easier because they only have to make buy decisions. If they buy at the wrong time (i.e., buy at too high a valuation), time can help them correct their little blip if they chose to invest in the right companies.

Instead of volatile stock prices, they can focus on the passive income generation, the valuation of the stocks they’re buying, and the dividend stocks to buy.

We’re not in a bear market yet

Passive income investors should brace themselves. Some economists are calling for a higher probability of a recession coming over the next 12 months. And we’re not even in a bear market yet.

The Canadian stock market, using iShares S&P/TSX 60 Index ETF (TSX:XIU) as a proxy, is down about 9% from its high. The U.S. stock market, using SPDR S&P 500 ETF Trust (SPY) as a proxy, has corrected almost 19%! So, we’re not quite in the bear market territory where a correction of +20% is required.

If the market downturn is giving you butterflies, it’s time to refocus on counting your passive income, buying at good valuations, and picking quality dividend stocks that are suitable for passive income investing

Tracking passive income generated

Bear markets should not deter passive income investors from their primary goal of generating safe and growing passive income. Naturally, you need to hold shares to collect passive income. So, passive income investors can largely ignore market volatility by focusing on their buy decisions.

Ensure you have a set of predefined, thoroughly thought out rules to determine the safe passive-income stocks to own and good valuations to buy them at.

I like to track how much dividend income I earn per month in a spreadsheet just so I get an idea of my annual investment income generation. Passive income investors can track their income generation as a way to encourage themselves and to stay focused on the path of passive income generation.

Buying at good valuations

Depending on the nature of a business, I would demand a different margin of safety for a dividend stock. For low-risk businesses that report stable earnings or cash flows, I generally wait for a +20% discount before considering buying.

For cyclical businesses or dividend stocks with more unpredictable earnings or cash flows, I would demand a +30% margin of safety before considering buying. You can think of this group as higher-risk dividend stocks.

Both groups should have sustainable payout ratios. The higher-risk group probably has lower payout ratios. Compare the payout ratios of the dividend stock you’re interested in with that of its peers and its industry median. If it’s way higher, then, the dividend could be riskier.

Dividend stocks to buy for passive income

For passive income, I would only focus on dividend stocks with decent yields, sustainable payout ratios, strong balance sheets, and ideally growing earnings or cash flows. Oh, and you’ll need to buy when such stocks are meaningfully undervalued.

You’ll find that the greater the safety you seek for your capital and your passive income stream, the harder it is to make buy decisions. That is, in most markets, your list of possible stocks to buy would be short.


One more thing — dividend stocks in the same industries tend to be exposed to similar risks. You want your dividend portfolio to be diversified because you’re holding for a long time for passive income. So, you’d probably want to pick the best companies from suitable industries and buy them at good valuations.

That’s it for the general concepts of generating passive income from a dividend portfolio in a bear market!

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Disclosure: As of writing, we don’t own any stocks mentioned.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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