My friend Julie messaged me in early 2015 when the price of Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) fell to the low $60-per-share level. She asked if I was buying.
I recall responding that I’ve been averaging in to the bank when I had funds available and when I thought the bank was at a good price. And at that level, the bank wasn’t expensive.
Later on, the shares fell to the high $50s level, and Julie messaged me again to say she was angry that the shares fell lower and she wished she’d bought at the $57-58 levels instead.
Finally, Bank of Nova Scotia shares fell to the $51 level in January 2016. Julie messaged me again, saying she’d already bought lots of shares on the bank’s way down, so she was uncomfortable adding more.
How many times have we heard a similar story like this?
Learning from experience
When quality companies such as Bank of Nova Scotia dip to reasonable valuations, these are opportunities to buy. No one had any idea that the bank would fall from the $70 level to the $50 level in less than one-and-a-half years.
So, Julie and any other investor shouldn’t blame themselves for not catching the bottom. At any one point in time, you can determine if a quality business is cheap enough for you to buy. You either buy it then or you don’t.
At the $70 level, when Bank of Nova Scotia was fully valued, investors could have sold a portion of their positions for the purpose of capital preservation and add back to the position as it fell. From the peak of $73 to the trough of $51, it was a dip of exactly 30%.
Looking in the rear-view mirror is much clearer than looking into the future. So, investors really should take it easy and just enjoy the dividends.
Improving the process
For quality dividend stocks, investors can set yield targets to buy at. For example, only buy Bank of Nova Scotia when it hits the 4.5% yield. Then only buy more when it hits the 5% yield and then 5.5%. This way, instead of focusing on the falling price, you’ll focus on the increased income you’ll get at lower prices.
Investors should view price dips as a gift from Mr. Market to buy quality dividend companies such as Bank of Nova Scotia at a cheaper price for a higher yield and higher long-term returns.
It’s really quite simple.