Passive Income in a Bear Market? 1 Stock Warren Buffett Bought

As we move into the final third of 2022 and head into the fall, it is clear that 2022 will not be a banner year for investors. Main indices such as S&P 500 Y nasdaq they are down 17% and 25%, respectively.

At times like these, while it can be difficult, it’s important to keep a long-term perspective and view market weakness as a buying opportunity. It can be helpful to look at legendary investors like Warren Buffett and realize that they are still buying stocks and adding to their positions. With prices down, many stocks offer better value, not to mention higher dividend yields.

This makes a bear market a great time to accumulate shares of dividend stocks to increase your passive income over time. Buffett has been doing just that in 2022, as one purchase in particular illustrates: financial ally (ALLY 2.21%).

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See the Oracle of Omaha

In many ways, Buffett is the lodestar of value investing, so he thrives in an environment like this, and he’s been buying Ally shares hand over fist in 2022. Buffett’s Berkshire Hathaway initiated a $390 million position in Ally during the first quarter of 2022, buying nearly 9 million shares of the Detroit-based bank for an average price of about $43 a share.

Ally was already highly valued when Buffett bought it. But since Berkshire’s initial purchase, shares have fallen further as the market worries that a slowing economy could trigger credit losses and that Ally could suffer from her large exposure to auto loans.

Rather than panic, Buffett doubled down on Ally. In fact, it more than doubled: During the second quarter of 2022, Berkshire increased its ally position by 234% and now owns 30 million shares of the company, worth approximately $964 million at current prices.

This calm under pressure and willingness to double down on a stock he believes in even though the market disagreed in the short term is a valuable lesson for all investors and shows why Buffett has outperformed the market in the long run. term.

How cheap is Ally?

Buffett loves cheap bank stocks, and Ally fits the bill. The shares are trading at 4.7 times earnings and a price-to-book ratio of less than 0.9. Book value is the sum of a company’s assets minus its liabilities, and is a common method used to value stocks in the banking industry. Ally’s book price value of less than 1.0 means that it is trading for less than the value of its assets if it were to be liquidated.

Buffett has always been a big believer in looking for a margin of safety when investing, and this book value discount absolutely provides investors with that. At this point, the intrinsic value of Ally’s assets should serve as a cushion against a significant decline in the share price.

Increased passive income

As mentioned, a bear market is a great time to opportunistically add positions in dividend-paying stocks at lower prices, which will increase your income and cost performance over time. Ally is not only cheap, but also a great value stock.

Ally’s shares now yield 3.7% better than the market. The stock is down 31% year-to-date, leading to increased performance, but Ally has also substantially increased her quarterly pay in recent years, from $0.19 per share in 2020 to $0.25 last year and $0.30 this year. Investing in high-quality dividend growth stocks like Ally is a great way for investors to stay calm under pressure and remember that buying now will add to your passive income for years to come.

In addition to dividends, Ally Financial is also returning capital to its shareholders in the form of share buybacks, which can help investors because buybacks reduce the number of shares and therefore increase earnings per share. They may also indicate that management feels the stock is undervalued. In early 2022, Ally’s board authorized a plan to buy back shares worth up to $2 billion. At today’s price, this means Ally could buy back a fifth of her shares on the open market.

When the going gets tough…

When the going gets tough, it’s always wise to step back and remember that investing is a long-term game. It’s also smart to look at what investors like Warren Buffett are doing. Buffett saw the value of a new position in a company he liked fall, and he took the opportunity to buy even more shares even though the market didn’t agree with his short-term view. Not only does this reduce Berkshire’s cost base in Ally’s stock, but it will also add a lot of passive income to his coffers.

Everyday investors can be like Buffett and add Ally Financial stock now to increase their passive income stream at a discounted price.

Ally is an advertising partner for The Ascent, a Motley Fool company. michael byrne has no position in any of the mentioned stocks. The Motley Fool holds positions and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: Long $200 January 2023 Call Options on Berkshire Hathaway (B-Shares), Short January 2023 $200 Put Options on Berkshire Hathaway (B-Shares), and Short $265 Call Options on Berkshire Hathaway (B-Shares). January 2023 in Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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