Worried about a stock market crash?
You’re not alone.
If the relentless coverage of every tick of the Dow isn’t enough to make you crazy, there’s always the never-ending speculation of an impending stock market crash to seal the deal.
Just yesterday on our weekly Income Investors Academy coaching call, one of my most calm, mild-mannered dudes had his panties in a twist because a STOCK MARKET CRASH IS HAPPENING AND OH MY GOD WHAT DO WE DO NOW?!
So, I’m going to walk you through the same stress-reducing math that I walked him through yesterday so you can stop breathing into a paper bag now.
This is fun math because I’m going to show you how you can turn that stock market crash upside down and give yourself a raise.
Yes, a raise.
Wait. Is This Really a Stock Market Crash?
Some context if you happen to be reading this after Trump decided to dunk on China with a tariff hike.
The market fell on Monday May 6th and again yesterday Thursday, May 9th.
Here’s the ugly chart.
If you’re not sure what you’re looking at, focus on the parts that are missing.
The places where the lines don’t touch? That’s no bueno.
WE WANT THE LINES TO TOUCH!
When the lines don’t touch it usually means… say it with me…
A Stock Market Crash.
Enough Backstory, Get to the Raise Part!
OK, geez. Back to the raise.
Now, for the purpose of this demonstration, I’m assuming you actually have stock market investments – stocks, equities, mutual funds, whatever.
I’m also assuming you would rather not sell your investments.
So, you have a stock [check] and you wanna keep it [check].
The next thing I can’t assume but want to encourage is that every stock you own should pay you income.
Usually in the form of a dividend or interest or a distribution.
Whatever you want to call it, it’s cash money.
Real, live dolla dolla bills y’all that the company pays you just for owning their stock.
It shouldn’t be a surprise that I (and Matthew McConaughey) feel strongly about this.
This site is TheIncomeInvestors.com after all.
For some weird reason not everyone is on board with the ‘make money two ways’ approach to investing.
But you should be.
So, if you have a stock AND you want to keep it AND it pays you income then here’s how to give yourself a raise in the midst of a stock market crash.
Here’s Where the Magic Happens
Let’s say you own a stock that pays a $0.56 annual dividend.
And let’s say that stock is BGC Partners (BGCP).
Yes, this is a real stock that we own.
We bought 200 shares at $5.38 investing a total of $1,076.
Our cost basis is $5.38 and the dividend yield is 10.4%
Cost basis is the original value of an asset.
It’s used to figure out the capital gain, which is the difference between the stock’s cost basis and the current market value.
Dividend yield is the annual dividend payment to shareholders expressed as a percentage of the stock’s current price. ($0.56 / $5.38 = 10.4%)
After Tariff Man did some Tweeting, BGC Partners stock price dropped to $4.88.
That’s a 9.3% decline.
And that’s what made everyone all…
But, we’re not selling because 1) we love the stock and want to keep owning it and 2) we’re not idiots who panic sell.
So, what do WE do?
We BUY MORE SHARES!
It’s like we’re stock shopping at the mall and everything’s 9.3% off!
We buy 200 MORE shares at $4.88 investing another $976.
Our total invested capital in the 400 shares is now $2,052.
And here’s where the magic comes in.
We now have a Blended Cost Basis of $5.13.
That’s just an average of the two ‘lots’ we bought – $5.38 and $4.88.
The total market value of our stock is $5.13 x 400 = $2,052.
And because our cost basis is lower, our dividend yield increases!
That’s how we get our raise.
In this case, our dividend yield is now 10.92% giving us a 5% raise!
So, thanks to this particular stock market crash, we reduced our cost basis by 4.65% and increased our dividend income by 5%.
Remember this the next time you know who decides to do you know what on Twitter.
Because, more income makes everything better. 🙂