The thought of a bear market sends shivers down the spines of most investors.

After all, who wants to see stock prices decline?

I, for one, wouldn’t mind it one bit. Bear Markets provide investors with opportunities to buy stocks at bargain prices.

That’s a positive event, not a negative event. Dividend investors in particular have a big advantage in bear markets.

You may also be interested in stocks that do well during bear markets to insulate your portfolio from the worst ‘bite’ of bear markets. This article covers 4 bear market stocks as well.

The Likelihood of Another Bear Market

The S&P 500 is very obviously overvalued. The historical average price-to-earnings ratio of the S&P 500 is 15.6. It is currently trading for a price-to-earnings ratio of 19.8.

Based on the numbers above, the S&P 500 needs to decline about 20% to reach fair value.

In addition to the market trading above its historical average price-to-earnings ratio, there are a number of potential crises that are threatening stock markets.

The global economy is looking increasingly fragile. Japan, Europe, and the U.S. carry high levels of debt. Greece and Puerto Rico are on the verge of defaulting. China is propping up its struggling stock market with central bank funded purchases.

There’s no question there will be another bear market. The only question is when… It could be a week from now, a month, or 3 years.

The Dividend Investor’s Advantage

Dividend investors have a big advantage in bear markets because we care about valuation. We’d rather buy Coca-Cola (KO) stock when it yields 5% than when it yields 2.5%. This is just common sense, but it is not so common among many individual investors.

Bear markets allow dividend investors to reinvest their dividends into stocks that offer yields higher than what one could expect in a bull market.

Dividend investors who are still saving have the opportunity to invest additional funds in dividend stocks trading at bargain prices. As an example, Aflac (AFL) stock briefly traded for dividend yields over 7% (!) during 2009. The stock currently has a 2.7% dividend yield. .

Psychology of Bear Markets

It takes a self-assured investor to not panic during bear markets. The average individual investor sells during bear markets and buys during bull markets. This is completely backward – and it’s the primary reason why individual investors tend to do so poorly.

I hope by reading this you will take action.

When the next bear market hits – and hits your portfolio (and everyone else’s) hard, do not sell.

DO NOT SELL.

Instead, either hold your stocks (which is okay), or buy while bargains are available (which is great).

If you can adjust your psychology to be excited for the bargains that bear markets provide – or at least be ambivalent about bear markets – you will greatly outperform your investing peers.

For me, the key to being excited about bear markets is to invest in high quality dividend growth stocks with a long history of increasing dividends. These are stocks that have proven themselves in both bull and bear markets.

That doesn’t mean high quality dividend growth stocks don’t see price declines in bear markets… These stocks fall as well, but not as much, on average. Case-in-point, the Dividend Aristocrats Index fell 22% in 2008, while the S&P 500 fell 38%.