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How to Invest in Dividend Stocks in a Bear Market: Stock Market Advice

  • It is very difficult to invest in this bear market as there is no reliable precedent for doing so.
  • T. Rowe Price’s John Linehan shared how he manages over $16 billion in wealth.
  • Here’s how Linehan finds dividend stocks for steady income when the economy slows.

John Linehan, chief investment officer for equities at T. Rowe Price, has experienced many different investment landscapes over his 33-year career. But he’s never seen a market like this.

Every bull and bear market is unique, Linehan said in a recent Insider interview. And while there are similarities between all, he thinks it’s a mistake to assume that what has worked in past downturns will work today.

“No two bear markets are the same,” Linehan said. “No two recessions are the same.”

Linehan continued, “None of them have a rhyme or reason. And trying to use a playbook from the past doesn’t necessarily make sense when you’re going into the future.”

Investors today are rightly focused on the economic risks stemming from the Federal Reserve’s decision to raise interest rates quickly to slow stubborn inflation, Linehan said. In a recent poll, CEOs are almost unanimous that this will lead to a recession as tighter monetary conditions force consumers to cut back on spending.

Linehan, who manages over $16 billion in assets at the T. Rowe Price Equity Income Fund (PRFDX), is currently trying to thread the needle between the offensive and defensive game.

“I really want to think about the risk we’re taking with the portfolio in this environment,” Linehan said. “I don’t want to get over my skis if I don’t have enough risk and I don’t want to get over my skis because I’m too risky.”

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If the market recovers, it will do so quickly, Linehan said. But at the same time, he said it’s prudent to brace for far greater downside risk if the Fed is forced to keep raising rates.

“I’m trying to build a portfolio that hopefully can survive the test of both extremes,” Linehan said. “And so we’ve tried to make part of our portfolio fairly defensive and part offensive and really look more for quirky names that we think will do well over time.”

How to invest in dividend stocks when recession risk looms

Unlike some portfolio managers, Linehan said he has a sizable portion of his net worth in his fund.

“I invest the money like it’s mine because in a lot of ways it is,” Linehan said.

As if that wasn’t enough pressure, Linehan is responsible for managing the pension funds and savings of countless other people. It gives him a “healthy sense of risk,” he said, but he can’t be paralyzed by the risk of losing some of the $16 billion he oversees.

“In terms of the amount of money we’re managing, I think if you focus on that, it can be overwhelming,” Linehan said. “So I try to focus more on creating the best portfolio — the optimal portfolio. Whether it’s $100 million or $100 billion, I don’t think it should change.”

Though the T. Rowe Price Equity Income Fund is down over 10% this year, it has beaten its index (which is down 13.7%) and is in the top 30% of funds for 2022, according to Morningstar.

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When it comes to finding the right stocks for his income-focused fund, Linehan says he looks for US and global companies attractive reviews and positive fundamentals that will offer solid dividend yields and perform well over a long time horizon.

Key valuation metrics to consider include a company’s price-to-earnings (P/E) ratio, enterprise value (EV) relative to sales, and price-to-book (P/B) ratio, as well as industry-specific metrics, Linehan said. These metrics go hand-in-hand with a company’s performance and the story it can tell about its business, he added.

But a great company isn’t always a great stock when it’s overvalued, the portfolio manager said, and conversely, cheaply valued stocks are sometimes discounted for good reason.

High, reliable dividend yields are critical to the T. Rowe Price Equity Income Fund, Linehan said, but the size of the quarterly payment is far from its only consideration on this front. Returns reflect a company’s financial health, ability to generate free cash flow and capital discipline, he said.

“We look for companies that demonstrate both an attractive yield and attractive attributes beyond yield,” Linehan said. “Finding only companies with the highest returns is a difficult environment in my view over the long term because you really have to question the durability of that return with any investment.”

Finally, Linehan keeps a long-term view of his investments, which he says is easy to say but difficult to do. His fund has a turnover rate of about 20%, which means he’ll hold a stock for an average of five years. Markets can fluctuate wildly between quarters, but over the long term, a company’s valuation, fundamentals and yield will cause it to either go down or go up, he said.

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“So many people focus on the short-term and whether a company will make or miss earnings for the next quarter that they get so caught up in the trees they lose sight of the forest,” Linehan said. “One of the things I want to make sure of is this — I can’t necessarily tell you what a company will do over the next quarter, but I can tell you if we think there’s an attractive fundamental backdrop over the next few years.” has years.”

This mindset means Linehan is patient with his holdings, especially in tough markets. Unless a stock’s thesis deteriorates to the point where it’s no longer true, Linehan said he tends to hold it — even with unprecedented and unpredictable risks on the horizon.

“We’re not pulling the plug just because the company is underperforming,” Linehan said. “We’ll be patient. And often that patience is rewarded.”

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