Doubling up on stocks when their prices drop sounds exciting. After all, it has the feel of gambling and the potential of winning big.
But you should resist the urge to invest heavily merely because a company’s share price has fallen. Remember, gamblers don’t make money in the long run. But astute long-term investors can make outsize profits.
So, how do you ensure you’re not wasting your money? One way is to look at dividend-paying companies whose stocks have dropped due to broad economic concerns, but whose underlying businesses remain sound.
Royal Caribbean Cruises (RCL) and Lennar (LEN) fit the bill. They’re cyclical companies whose results fluctuate with the economic cycle, but investors can confidently collect dividends while waiting for their stock prices to recover.
A dividends sign with dollar bills and coins on either side.
Image source: Getty Images.
1. Royal Caribbean Cruises
Even though consumers have faced challenges stemming from persistently high prices and concerns about their jobs, Royal Caribbean Cruises has posted strong results.
First-quarter revenue increased 11% year over year to $4.5 billion. And management has similar expectations for the year, projecting 10% revenue growth.
However, if the economy significantly weakens, even Royal Caribbean’s higher-income passengers will feel the effects. That could hurt revenue, and if oil prices remain elevated, fuel costs will also dent profitability.
Investors seem concerned about this possibility. They’ve sent the shares down 4.8% this year (through May 1). During this time, the S&P 500 index has gained 5.6%.
Still, should this economic scenario come to pass, demand should come roaring back as people clamor once again for Royal Caribbean cruises once the economy improves. Meanwhile, Royal Caribbean recently raised its quarterly dividend by an eye-popping 50%, to $1.50 a share.
At the new rate, the shares have a 2.3% dividend yield. That’s more than double the S&P 500’s 1.1% yield.
With a payout ratio of 26%, investors can take comfort in the fact that Royal Caribbean can easily afford the payouts, even in the event of a sharp earnings decline.
2. Lennar
Lennar has been a homebuilder for more than 70 years. It builds single-family homes targeted at first-time, move-up, active adult and luxury homebuyers. Historically, it’s known for targeting first-time and move-up buyers.
With high interest rates keeping mortgage rates elevated, buyers have generally shied away from purchasing homes. January’s new home sales dropped to 587,000 in January, down 17.6% from the previous year, according to the U.S. Census Bureau. The median sales price fell 6.8%, which wasn’t enough to boost unit sales.
With long-term interest rates increasing due to the fears over inflation caused by the Iran war, the 30-year fixed-rate mortgage stood at 6.3% at the end of April, according to Freddie Mac. The rate hovered at about 6% for the first two months of the year, until military action broke out at the end of February.
With this tough economic and housing environment, it’s no wonder Lennar’s revenue took a hit. The company’s first-quarter homebuilding revenue fell 13% compared to the previous year, to $6.3 billion. The average price dropped 8%, and the number of homes delivered fell 5%.
Lennar’s stock price performance reflects these short-term challenges. The shares have fallen 14% this year.
But Lennar has been through challenging times, and not only survived, but thrived. With the company’s know-how and experience, it will undoubtedly do so again. After all, people need and want homes, and demand will come roaring back when economic conditions improve.
The company has raised its dividends every few years. It currently pays a quarterly rate of $0.50 a share. That equates to a market-beating 2.3% dividend yield.
And Lennar can easily afford to make these dividend payments. It has a payout ratio of 29%. This provides a nice cushion, even if earnings remain depressed for a period of time.
— Lawrence Rothman
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