News Analysis date published New: 
Wednesday, June 27, 2012 - 08:30
New Date created: 
Wednesday, June 27, 2012 - 15:19
New Date last updated: 
Wednesday, June 27, 2012 - 08:30

The Safest Stocks to Own in a Downturn

Wednesday, June 27, 2012 - 8:30am

I bought my first stock in the summer of 1979...

I had just finished my bachelor's degree. That investment turned out to be a great investment. I was able to make the down payment on my first home, mostly with the profits from that single stock.

Since then, I've managed a $5 million trust as a board of trustee for a nonprofit service organization... oversaw an $100-plus million annual budget as an engineering manager for IBM... and currently manage a $200,000 "real-money" portfolio for my premium newsletter, The Daily Paycheck.

And in my three decades of investing experience, I've seen a lot of bad markets...

"Black Monday" in 1987, the LTCM crisis of 1998, the "dot-com" bubble of the new millennium, and the latest subprime crisis that sent the economy into the worst recession since the Great Depression... I was there for all of them.

Surviving all those downturns has taught me one thing when it comes to investing:

Dividend payers outperform in bad markets
See, dividends act like shock absorbers, cushioning your total returns when market prices hit a pothole. By owning regular paying dividend stocks, your dividend payments should help off-set some of your losses when the market goes through a rough patch.

But the safety provided by dividend stocks is more than just a function of the yield buffer alone...

To maintain dividends, companies must have a fairly steady, predictable revenue stream. In general, dividend-paying companies hail from sectors that are more resistant to economic fluctuations.

These companies tend to be safer ports in stormy markets. When economic conditions are uncertain or poor, investors tend to abandon riskier stocks for more recession-resistant companies that pay dividends.

Even within the S&P 500 Index, we can see the healing power of dividends in down markets. From 1972 through August 2011, nondividend paying stocks in the S&P 500 lost 1.74 times more than the index's dividend-paying stocks during bear markets.

But that's not all...

Not only are dividend stocks safer during a sell-off, they're also less volatile. Within the S&P 500 Index, stocks that pay dividends are roughly 36% less volatile than their nondividend paying counterparts.

Low volatility investments that offer a dividend buffer are just what you want during market turbulence.

This summer has the potential to mimic last summer. Many of the same uncertainties are still unresolved. We are still worried that Europe's problems could trigger an economic slowdown in the rest of the world, and we are still waiting to see if China is able to keep its economic growth engine running.

After May's market turbulence and historically low Treasury yields, more investors are looking for safety in defensive stocks with above-average yields -- much as they did a year ago.

Maybe this is just a minor pothole... perhaps things will work themselves out and we'll get a rare summer relief rally.

Action to Take --> Whatever the case, by owning regular paying dividend stocks, you'll sleep better knowing your portfolio is designed to lessen any bumps in the road ahead.

Amy Calistri does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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