The words ‘stock market crash’ fill many people with fear and foreboding. That is understandable.
A crash can mean the value of a share portfolio plummets in short order. While that may only be a paper loss, it is still disconcerting for many investors.
But there are two sides to every story — and that is also true when it comes to a stock market crash. In fact, for someone who is investing with the intention of funding their future retirement, it can actually offer a once-in-a-decade opportunity to buy a variety of brilliant shares at bargain prices.
The relationship between share price and dividend yield
A cheap share price can be attractive for someone whose objective is capital gains. But it also offers the opportunity to earn a higher yield than would be possible buying exactly the same share when it costs more.
That is because dividend yield is a function of dividend per share (which is the same for all shares of a certain class) and the price paid for it, which can vary for exactly the same share, depending on when it was bought.
A sudden chance to buy cheap
As an example, let me use FTSE 100 financial services provider Standard Life (LSE: SDLF). At the moment, its yield is 6.8%. That is already juicy and well over double the FTSE 100 average.
Someone who bought in February 2020 would be earning only a little more, as at that time the share cost around 98% of what it does now.
But the following month it plummeted in the pandemic stock market crash. That pushed the share price down to just over £5. That is around 62% of the current share price.
So someone who bought Standard Life shares then would now be earning a yield of around 10% not the 6.8% on offer today.
This could help target early retirement
That is a substantial difference, but 6.8% is already a big yield. Compounding at that rate annually would allow an investment to double in 11 years.
But compounding instead at 10% annually, doubling the investment would only take eight years. In other words, buying great shares when they are on sale could help someone earn a higher yield. That could potentially let them hit their financial goals sooner and retire earlier.
What I’m doing now
As it happens, even at today’s price, I think Standard Life is worth considering. It has a proven business model and deep expertise in an area of personal finance that will likely endure for decades, thanks to a focus on pensions and retirement savings. It benefits from economies of scale as one in five adults in the UK are clients.
One risk is its mortgage book. If the property market stumbles, it could be forced to write down some valuations, hurting earnings.
I do not know when the property market may next crash, just as I do not know when the stock market will next be hit. Instead of trying to time the market, I am using my time to update my list of shares I would like to buy if a crash gave me an opportunity to buy them at an attractive price.
Should you invest £5,000 in Standard Life right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Standard Life made the list?
Christopher Ruane does not hold any positions in the companies mentioned.
