The Motley Fool

Stop Speculating! Instead, Buy These Undervalued Dividend-Growth Gems on the Dip!

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After October’s “half-baked” correction, prudent contrarians ought to be thinking about nibbling away on the dip, while the market remains in oversold territory. If you’ve tuned into CNBC lately, you’ve probably heard talking heads compare the latest six-plus percentage drop in the S&P 500 to the Flash Crash of 1987 or the Great Recession of 2008.

Some doomsayers are coming out with their +40% peak-to-trough decline projections, citing higher rates as the catalyst that will “pop the bubble” that’s been inflated by the “artificially low” interest rate environment. On the other side of the spectrum, other pundits claim that this is a run-of-the-mill sell-off that may reverse if Fed chair Jay Powell goes back on his willingness to overshoot when it comes to rate hikes.

As a retail investor, it’s easy to be confused with so-called experts arguing their case for where the markets are headed next. Instead of buying into an extreme case, investors need to realize that nobody, not even the seasoned economists on television, know where the markets are going in the short term. Many contingent events could realistically steer the market in any direction, so it’s not worth attempting to play one side of the coin at this juncture.

Instead of speculating on when the bottom will be in, prudent investors should be nibbling away at the bargains that exist today with the intention of buying more stock incrementally should the markets continue to retreat. Dollar-cost averaging on the way down is a great way to drive your cost basis lower without needing to worry about the trajectory of stocks over the short term. And if you follow through on your incremental buys, you’ll average around the market bottom, rather than taking a shot in the dark and doing all your buying in one go.

Now that we’re around 5% off from the high, it’s time to do at least a bit of buying, so you don’t risk coming out of the dip empty handed should the bottom already be in.

Now, nobody knows whether the bottom is in, but that isn’t the question you should be asking yourself. You should focus on the micro picture and be on the hunt for stocks to buy every time the markets fall X percent from peak to trough.

And as the markets fall, you don’t want to buy speculative growth stocks; they’ve got the farthest to fall as the growth-to-value rotation continues chugging along.

The Fed is fearful of inflation in spite of CPI numbers that aren’t at all indicative of a drastic pickup in inflation. If the Fed ends up being right with its inflation forecast, however, the growth-to-value rotation has likely just begun.

Moreover, the Fed’s rate hike auto-pilot will probably cause high-yield dividend stocks to continue to face pressure, as investors gravitate towards fixed-income securities with their fatter risk-free yields.

So, with growth and high yield going out of favour, what should investors be buying?

The answer is, high-quality dividend-growth stocks — most notably, dividend aristocrats that have been hiking their dividends every year for decades.

These names not only have growing dividends but also stand to see stock price appreciation over the years ahead. Think Canadian National Railway (TSX:CNR)(NYSE:CNI), any one of the Big Five Canadian bank stocks, or BMO Covered Call Canadian Banks ETF (TSX:ZWB), which can provide investors with a higher degree of protection as the markets continue to exhibit escalated levels of volatility.

Foolish takeaway

CN Rail or the Canadian banks have nearly guaranteed annual dividend hikes to go with above-average capital gains. Add bargain-basement prices into the equation, and you’ve got the perfect securities that prudent investors should be buying as Mr. Market loses his temper.

Stay hungry. Stay Foolish.

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 Joey Frenette owns shares of Canadian National Railway. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. Canadian National Railway is a recommendation of Stock Advisor Canada.

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