IIt’s easy to get carried away by the fear that usually accompanies a bear market. However, if you take a step back and think long term, you can usually find some pretty good investment opportunities while others in the market are irrationally negative. Passive Income All-Stars Franklin Resources (NYSE:BEN) and T price. Rowe (NASDAQ: TROW) look like two such gems today – if you can get over the fact that a bear market is terrible for their asset management business. Here’s what you need to know.
Focus on the dividend
Before discussing anything else, it’s worth considering how reliable Franklin Resources and T. Rowe Price have been for dividend investors. Although both are dividend aristocrats, they have each increased their payouts every year for longer than the 25-year minimum for that designation. Franklin Resources has increased its dividend every year for 42 years. T. Rowe Price lags a bit behind at 36.
These are impressive backgrounds, but worth putting into a broader perspective. There have been several bear markets over the past three and a half decades. There have also been several recessions. In fact, one was so bad it was dubbed the Great Recession. There were very real fears during this 2007-2009 recession that the global financial system would crash and fail. And yet, Franklin Resources and T. Rowe Price continued their dividend hikes.
This shows a massive commitment to shareholders that should not be ignored. In fact, it suggests that bear markets should probably be on the cards for investors because the management teams of these two companies clearly know how to deal with market disruptions.
Bear markets are tough
The words “taken in stride” above are important because you should not ignore the fact that bear markets are very bad for asset managers. These companies generally depend on the fees generated by the assets they have under their control. During a market downturn, this pool of money will shrink, leading to lower commission income. And frightened investors often withdraw money from the market, which further reduces commission income. This is one of the main reasons why the S&P500 is down about 17% from its highs of last year, but T. Rowe Price is down 47% and Franklin Resources is down 33%.
Expect weak performance from these two industry leading names for as long as the bear market lasts. To put some numbers on this, Franklin Resources’ assets under management fell by around $200 billion between the start of 2022 and the end of June. T. Rowe Price, meanwhile, saw a decline of more than $300 billion. Although the fees charged by these companies are usually relatively small in percentage terms, when you’re talking hundreds of billions of dollars, the lost revenue really starts to add up.
This too should pass
Every bear market in stock market history has been followed by a bull market, and vice versa. One, essentially, sets the stage for the other. So, although the news is bad today, it is very likely that things will eventually improve in the future. This will increase the value of the assets that T. Rowe Price and Franklin Resources oversee and bring new liquidity to investors – at least that’s what has happened historically. Assuming long-term trends remain roughly similar, these two longtime dividend payers should see their financial results and stock prices rebound at this time.
In the meantime, however, don’t be surprised if companies take advantage of the recession to buy up smaller competitors. Franklin Resources, indeed, made two acquisitions in early 2022 and recently announced a third. This particular company has a long history of acquisition-driven growth, so this is a fundamental approach. T. Rowe Price is less aggressive on this front, but his acquisitions are still worth watching. For example, it reached a deal at the end of 2021. Indeed, they could both exit this bear market as companies better positioned than when they entered.
Don’t Pass Up These Passive Income Giants
If you can bear to go against the grain, Franklin Resources and T. Rowe Price are both worth a close look today for investors looking for financial exposure. Yes, stocks are beaten. Yes, performance will be weak in a bear market. But these asset managers have proven they can handle such times with ease and come out stronger. This is exactly the type of stock that long-term dividend investors should want in their portfolios. Additionally, Franklin Resources’ dividend yield is around 4.5% today, while T. Rowe Price’s dividend yield is around 4.1%.
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Reuben Gregg Brewer has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.