For some new investors, this may be their first opportunity to experience a volatile market. To make the most of these times, here are some concepts to help you succeed and thrive when a market correction rears its ugly head:
I. Remember Why We Are Income Investors
The goals of an income portfolio are different than those of a capital appreciation based portfolio. The good news is an income portfolio consisting of dividend growth stocks can not only succeed, but excel during a down market.
An investor in dividend growth stocks is seeking to build a steady stream of rising income from solid companies. While everyone else is panicked about their portfolio's decline, income investors see the downturn as an incredible buying opportunity.
II. When The Chips Are Down, Go For The Blue Ones
If a market correction makes you feel dark and gloomy, remember one of the true bright spots of a down market is the ability to strategically pickup some bargains in the bluest of blue chip stocks. Normally, these stocks are difficult to buy due to a built in "safety" premium for times like these.
During turbulent times, over-allocate safe stocks and save the risker investments for another day. Here are some traditional dividend stocks that have a Risk Rating of 1.50 or lower currently trading at a discount:
3M Co. (MMM) provides enhanced product functionality in electronics, health care, industrial, consumer, office, telecommunications, safety & security and other markets via coatings, sealants, adhesives and other chemical additives.
Yield: 2.5% | Risk Rating: 1.25 | Discount: 9.3%
Johnson & Johnson (JNJ) is a leader in the pharmaceutical, medical device and consumer products industries.
Yield: 2.6% | Risk Rating: 1.00 | Discount: 7.3%
Genuine Parts Co. (GPC) is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products.
Yield: 2.8% | Risk Rating: 1.00 | Discount: 8.7%
The Coca-Cola Company (KO) is the world's largest soft drink company, and also has a sizable fruit juice business.
Yield: 3.1% | Risk Rating: 1.50 | Discount: 16.3%
Exxon Mobil Corp. (XOM), formed through the merger of Exxon and Mobil in late 1999, is the world's largest publicly owned integrated oil company.
Yield: 3.2% | Risk Rating: 1.25 | Discount: 5.8%
AT&T Inc. (T) provides telephone and broadband service and holds full ownership of AT&T Mobility.
Yield: 4.4% | Risk Rating: 1.50 | Discount: 12.8%
III. Sometimes We Will Misfire
As hard as we may try to pick all winners, sometimes a good stock will go bad, cut its dividend, and we'll have to sell it. Sometime it is one of our higher yielding stocks, leaving a large void in our annual dividend income. How do we manage this? Here is what I do:
- First, when you suspect a stock might cut its dividend put it "On the Shelf" and don't make any future purchases, until you are convinced the dividend will not be cut.
- Manage the risk of a dividend cut by limiting your allocation to any single stock to a maximum of 5%.
- Keep some high risk/high yield allocation in reserve. When the market goes south, we need to under-allocate high risk/high yield stocks. This will allow room in our allocation to selectively purchase these types of stocks when we choose to sell a past performer that is no longer meeting our expectations.
IV. Don't Let Fear Derail Your Long-Term Plan
Someone once said, 'Your emotions are the best inverse indicator of what you should be doing in the market.' Many people are selling it all and walking away from the market. They'll be back though - when the market is reaching all time highs, only to get out when it begins to fall with no end in sight. This is a long-term recipe for disaster.
For those of us who still have time before retirement, down markets present us with a golden opportunity. What will you choose to do with it?
Full Disclosure: Long MMM, GPC, JNJ, KO, T in my Dividend Growth Portfolio. See a list of all my Dividend Growth Portfolio holdings here.
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- 7 Dividend Stocks Yielding Over 3%, With Tiny Payout Ratios
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