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3 Indicators to Help Determine When to Buy Dividend Stocks in This Market Correction


Every investor knows the adage to buy low and sell high. How do you go about applying it? What’s “low enough”, especially in a market correction?

There are many indicators you can use. I’ll talk about a few. When it comes to dividend investing, you can look at the dividend yield range history as an indicator.

Fishing like investing needs patience. Image by andreas160578 from Pixabay

Technical indicators

I like using the iShares S&P/TSX 60 Index ETF (TSX:XIU) as a proxy for the Canadian stock market. The 50-day simple moving average (“SMA”) crossing below the 200-day SMA in June, a death cross, was a bearish sign.

The hammer, shown as the first candle in the chart below, is a bullish sign. Unfortunately, it did not follow through the following week, with the bottom of the pandemic market crash coming in in late March 2020.

The weekly chart above hasn’t shown higher lows and higher highs. And the price is under the 50-week SMA. So, cautious investors would wait for clearer signs of a consolidation first.

Dividend yield range

For dividend stocks that pay safe (and ideally growing) dividends and provide decent yields of, say, 3% or higher, you can probably use the dividend yield range history as an indicator for a potential buy.

For example, this chart shows the 10-year dividend yield range history of Toronto-Dominion Bank (TSX:TD)(NYSE:TD), a quality bank stock that I’m eyeing in this market correction.

TD Dividend Yield Chart

TD Dividend Yield data by YCharts

In normal markets, getting a yield of 4% or higher is a good deal for investors. At the recent quotation of $83.22 per share, TD stock offers a yield of close to 4.3%, so it’s actually not bad. Long-term investors can certainly start buying here.

On the other hand, investors can argue that because of a looming recession, the risk has increased in the near term for banks, which is why the whole sector is more discounted than normal.

Should TD stock hit a +5% yield , it would be a super deal for interested investors to back up the truck.

Is the whole sector or industry cheap?

Stocks in the same sector or industry tend to move in tandem. Is the sector or industry cheap? If only the stock you’re interested in is cheap, then, it may be smart to wait for the whole sector to tank before buying.

I recently made the mistake of getting into Canadian Western Bank (TSX:CWB) too early even though I thought its bigger peers weren’t cheap. Thankfully, it’s not a non-recoverable mistake because I believe CWB is a safe dividend stock.

The bank is a big bargain from an income and long-term total-return perspective. It pays a safe dividend yield of almost 4.8% on a recent payout ratio of below 38% of earnings.

Additionally, it has retained earnings that could serve as a buffer for almost 17 years of dividend payments (based on the most recent quarter’s dividend payment).

Should CWB stock revert to its normal long-term P/E of about 12 by the end of fiscal year 2024, an investment at $25.96 per share would return about 128%, equating to annualized returns of 42.9%.

CWB Dividend Yield Chart

CWB Dividend Yield data by YCharts

I liked CWB before. I like it even better now. However, some income investors might prefer to buy its bigger Canadian bank peers despite having to potentially pay a higher multiple and get a smaller yield. And that’s totally fine.

The precondition

The precondition for using the three indicators above for potential buys is that you have determined the dividend stock is worthy of investing.

Do you use other indicators for your dividend stock purchases? Feel free to share in the comments below!

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Disclosure: As of writing, we own TSX:CWB.

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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