It's coming.
What? A stock market downturn. Could it happen soon? Perhaps.
Recently, a number of stock market experts have been trotting out a chart showing the correlation between the National Association of Home Builders' Home Market Index and the S&P 500 12 months later.
See, the Home Market Index has collapsed. Homebuilders such as Centex (NYSE: CTX), Toll Brothers (NYSE: TOL), and Pulte Homes are 20% off their highs. And these experts worry the entire market is next.
Are you prepared to save yourself?
A brief history of crashes
The last stock market crash started in 2000 and lasted all the way until 2002. If you were invested during that time, you know how much it hurt. The next crash will hurt as much, if not more, particularly if you make the same mistakes again.
So what could have saved you in 2000?
The secret to survival
Take a look at this chart. You'll see that while the S&P 500 dropped significantly, two non-dividend-paying stocks -- Microsoft (Nasdaq: MSFT) and Amazon.com (Nasdaq: AMZN) -- dropped even more. Conversely, two established dividend payers -- Altria (NYSE: MO) and Income Investor recommendation Johnson & Johnson -- dropped less. In fact, they weathered the crash and actually made money for investors during the bear market.
If you think I'm cherry-picking companies, take a look at this chart. It shows that while the mostly non-dividend-paying Nasdaq 100 lost far more than the S&P 500, the Vanguard Windsor II fund, our proxy for large-cap companies with above-average dividend yields, did much better. Today, Windsor II counts dividend stalwarts such as Altria, Citigroup (NYSE: C), and Bank of America among its top holdings.
Yes, dividends are that important to helping you preserve your wealth and even profit during prolonged market downturns. That's just one of the reasons Microsoft did its shareholders justice by finally declaring a dividend in 2003.
The Foolish bottom line
Now that you know the importance of dividends to protecting your wealth during stock market downturns, you'll invariably want to know what the best dividend stocks to own right now are, particularly as some signs point to a market on the edge.
That's where James Early and his research team at Motley Fool Income Investor can help. They've identified a number of stocks that can help you anchor your portfolio during good times and bad. And while you may know some of the names, I guarantee there'll be some you don't recognize. You can see all of his recommendations with a free 30-day trial. Just click here for more information.
This article was first published on Nov. 17, 2006. It has been updated.
Tim Hanson does not own shares of any company mentioned. Johnson & Johnson and Bank of America are Income Investor recommendations. Microsoft is an Inside Value recommendation. Amazon.com is a Stock Advisor recommendation. The Fool's disclosure policy wants you to know that while one is the loneliest number that you'll ever do, two can be as bad as one. In fact, two is the loneliest number since the number one.
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