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

As we turn the corner toward the final third of 2022 and head into fall, it’s clear that 2022 will not go down as a banner year for investors. Major indexes like the S&P 500 and Nasdaq 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 look at the market weakness as a buying opportunity. It can be useful to look to legendary investors like Warren Buffett and to realize that they are still buying stocks and adding to their positions. With prices down, many stocks offer better values, not to mention higher dividend yields.

This makes a bear market a great time to accumulate shares of dividend stocks to build up your passive income over time. Buffett has been doing just that in 2022, as illustrated by one buy in particular: Ally Financial (ALLY 2.21%)

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Look to the Oracle of Omaha

In many ways, Buffett is the North Star of value investing, so he thrives in an environment like this, and he has been buying shares of Ally 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 a great value when Buffett bought it. But since Berkshire’s initial purchase, the shares have fallen further, as the market frets about the possibility a slowing economy will lead to loan losses and that Ally could suffer from its large exposure to auto loans.

Instead of panicking, Buffett doubled down on his position in Ally. In fact, he more than doubled down — during the second quarter of 2022, Berkshire increased its Ally position by 234% and now owns 30 million shares of the company, worth about $964 million at today’s prices.

This calmness 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 achieved market-beating results over the long run. 

How cheap is Ally?  

Buffett loves a cheap bank stock, and Ally fits the bill. The shares trade at 4.7 times earnings and at a price-to-book ratio of less than 0.9. Book value is the sum of a company’s assets minus its liabilities, and it is a common method used to value stocks in the banking sector. Ally’s price-to-book value of less than 1.0 means that it trades 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 discount to book value absolutely provides investors with that. At this point, the intrinsic value of Ally’s assets should serve as a backstop against the stock price declining significantly further.

Ramping up passive income 

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

Shares of Ally now yield a market-beating 3.7%. Shares have declined 31% year to date, which has led to the yield increasing, but Ally has also increased its quarterly payout substantially over the last few years, from $0.19 per share in 2020 to $0.25 last year and to $0.30 this year. Investing in high-quality dividend growth stocks like Ally is a great way for investors to keep their cool under pressure and remember that buying now will add to their 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 repurchases reduce the share count and thus increase earnings per share. They can also signal that management feels the stock is undervalued. At the start of 2022, Ally’s board authorized a plan to repurchase as much as $2 billion worth of shares. At today’s price, this means that Ally could buy back one-fifth of its shares on the open market.

When the going gets tough…

When things get tough, it’s always wise to take a 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 a new position in a company that he liked fall in value, and he used the opportunity to buy even more shares even though the market disagreed with his view in the short term. This not only lowers Berkshire’s cost basis in Ally shares, but it will also add plenty of passive income to its coffers.

Everyday investors can be like Buffett and add shares of Ally Financial now to build up their passive income stream at a discounted price.    

Ally is an advertising partner of The Ascent, a Motley Fool company. Michael Byrne has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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