Take Advantage of Volatile Stock Prices

Buying Baidu Inc. (ADR) (NASDAQ:BIDU) and Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) on their recent dips would have yielded double-digit returns. Should you buy them today?

| More on:
The Motley Fool

With stock prices going up and down during market hours, investors may be at a loss as to when to buy and potentially sell their holdings. In fact, stock price movements can be very irrational. Investors should take advantage of the market’s irrational behaviour.

Baidu example

Take Baidu Inc. (ADR) (NASDAQ:BIDU), often seen as China’s copycat of Alphabet Inc., as an example. Baidu fell to as low as US$100 per share last year when China’s growth was expected to slow down further.

Stock price bottoms are impossible to catch. However, it doesn’t mean investors can’t take advantage of the market’s fear. Even if you bought the Baidu shares at US$145 per share in the last two dips, you’d still be sitting on unrealized capital gains of 34% now that the shares trade at a more reasonable valuation with relation to the company’s growth potential at US$195 per share.

Unfortunately, the opportunities to buy Baidu at a margin of safety are gone for now. Interested investors should consider Baidu if it dips to US$150-160 per share.

Bank of Nova Scotia example

In January this year, Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) dipped to almost $51 per share and yielded 5.5%. Again, it would have been difficult to buy at the bottom. It was feared that low oil prices would trigger a weaker Canadian economy, potentially bringing it into a recession and thereby impacting the bank’s profitability.

Yet buying low is a very effective way to reduce risk because you pay less for more, assuming the factors putting pressure on stock prices are temporary. If you’d bought Bank of Nova Scotia shares at $55 per share, it’d yield 5.2% after its dividend hike in the first quarter, and you’d be sitting on unrealized gains of 15%.

After you buy quality dividend-growth stocks such as Bank of Nova Scotia, you can essentially hold on to its shares forever and collect a perpetual stream of dividends. In fact, at under $64 per share, the bank is still discounted by about 10% from its normal multiple, and it offers a competitive yield of 4.5%.

Conclusion

Investors should buy quality companies when others are selling because buying on dips reduces your risk as well as increases your total returns. At other times, quality companies can be overvalued. Take the Canadian telecoms for example. That’s when investors should decide whether to hold on to the companies or to take their chips off the table by selling a portion or the entire position.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of Bank of Nova Scotia (USA). David Gardner owns shares of Alphabet (A shares) and Alphabet (C shares). Tom Gardner owns shares of Alphabet (A shares) and Alphabet (C shares). The Motley Fool owns shares of Alphabet (A shares) and Alphabet (C shares).

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »