On 1/13/15, it was a rough day, with the S&P 500 falling 2.5%. That is a lot. What does that mean for me? Well, I think it is stocking buying time. Since our plan is to own our stocks for a long time, buying on down days will help increase our immediate dividend yield now and in the future.
One of the current issues with the market is low oil prices. Low oil prices mean cheap gasoline price. How is that a problem? I agree, I like cheap gas prices. The problem is a lot of oil companies are in too much debt. And when they have too much debt and struggle to pay their bills, it makes the people who lent them money worry. When you are losing a lots of money, you will be slower to reinvest your money. Would you slow down to figure out where you went wrong and build cash? This means that even though low oil prices is good for most people, it can be an issue for a large sum of money flowing around.
Good Dividend Pick with Low Oil Prices
So, with the oil issue causing weakness in the market, I am thinking of buying something that directly benefits from low oil prices. Airline stocks have a large expense of oil. Well, they use jet fuel which is made from oil. With the price of jet fuel so low, it will help them make more money. Even with the chance of the economy weakening, it should affect them less this time around. There are fewer major airlines with the mergers and bankruptcies. This will help the protect them to the downside. And with the cost of oil down, it will make it easier to lower prices to keep the planes full.
But we need dividends, that’s why we are investing. Wait, let me check my list. Yes, we are still investing for dividends. While the airline industry dividend payments are still low, there is minimal reason why they cannot grow. Right now, American Airline (AAL) the dividend only 0.6% of revenue. If that went to 5% of revenue, the dividend yield would go from 1% to 8.3%. That would be an awesome yield. And many companies pay that percentage. And American Airline (AAL) is purchasing a lot of shares with how cheap they are. Their PE ratio is only a 6 and the P/S ratio is only a 0.6. This is cheap enough to be worried about it. What do they know that we don’t? We believe the cheapness is from them being an airline and the past bankruptcies of the airline industry, which is a fair concern. So this pick is definitely not risk free. But with the improvements to the industry, we believe those can be a thing if the past.
So, to answer our original question, can an airline, specifically American Airline (AAL), be a dividend stock. The answer is yes. There will probably be a long wait until we get a super large yield. We believe we will be rewarded one day. We bought 7 shares for $290.43 including commission. This will add $2.80 a year in dividends. While giving us a small yield now, this can greatly increase in the future. And this is our 1st pick in transportation, which will increase our diversification. Plus, with it benefiting from low oil, it will benefit as long as oil is low.
Newest stock purchases can be found here.
Do you think American Airline (AAL) is a good dividend pick with low oil prices? Feel free to comment below.
Disclosure: We are long AAL