Pssssst!
Hm?
Do you want your portfolio to be making money right now?
Uh, yeah. Don't you?
I mean right now. For real!
Dude, you may not have noticed, but the market's kinda scary at the moment.
Scary for those who don't know where to find the opportunities, sure.
Um ... if this is a penny-stock pitch, y'all can stop now. I'm not that dumb.
Nope. This is sort of the opposite of a penny-stock pitch, actually.
OK, I'll bite. What's your deal?
Here's my deal: Buy stocks in recession-resistant businesses that pay dividends.
The case for dividends has never been stronger
If you're a buy-and-hold investor, I'm convinced that this is the strategy to be thinking about right now. The markets might go up, they might go down, but if you're buying at current prices and holding for the long term, you'll make money either way.
Think about it: If you buy a stock with a 5% dividend yield, you'll be making 5% on your initial investment whether the market goes up, down, or sideways. If you're reinvesting that dividend and the market goes down, you'll be automatically buying more stock at a lower price. Think about that: automatic, self-funded dollar-cost averaging, and you don't have to do a thing!
Sure, a bond will also give you income. There's definitely a case to be made for holding bonds right now. But with a dividend stock, when the market goes up -- and it will eventually -- you'll get capital appreciation. And if it takes a while, so what? Your dividends will be buying more stock in the meantime.
Like the rest of the market, dividend stocks are selling for much less than they were just a few months ago. For the companies that have been able to sustain their dividend payments, the lower stock prices mean higher yields. Check out these examples:
|
Stock
|
52-Week High
|
Closing Price on 11/25/08
|
Current Dividend Yield
|
|
Allied Irish Banks (NYSE: AIB)
|
$48.14
|
$6.43
|
29.7%
|
|
Bristol-Myers Squibb (NYSE: BMY)
|
29.76
|
20.57
|
6%
|
|
DuPont (NYSE: DD)
|
52.49
|
24.13
|
6.8%
|
|
FranceTelecom (NYSE: FTE)
|
39.15
|
25.86
|
10.7%
|
|
Altria (NYSE: MO)
|
79.59
|
15.80
|
8.1%
|
|
Newell Rubbermaid (NYSE: NWL)
|
27.79
|
10.95
|
7.7%
|
|
Partner Communications (Nasdaq: PTNR)
|
24.70
|
15.77
|
7.9%
|
Sources: Motley Fool CAPS, Yahoo! Finance.
See what I mean? But I have to add a big note of caution: Some of those yields, while factually accurate, might be misleading. Many companies will need to cut dividends to get through the recession. And some companies have crazy-high yields because their stocks were sold way down for a reason. (Translation: Don't buy any of these stocks -- especially Allied Irish Banks -- without doing a lot more research first. I included AIB in the chart specifically to make this point. Seriously.)
That leads me to a larger point: Determining whether a company is going to be able to pay dividends through a protracted recession is not a simple process. We can make some good guesses off the top of our head, but even a company with products that seem recession-hardy (like toothpaste, say) can have a troubled balance sheet, or another division that's underperforming, or something else wrong with it that isn't apparent on first glance.
Wait. Your headline said one great buy.
Indeed it did. I think it's important for long-term investors to be participating in this market. But I also think that if you're not comfortable with stock analysis, hiring some help -- i.e., buying an active mutual fund -- makes a lot of sense. Especially now.
But we all know that active mutual funds can be a sketchy proposition. We need the right fund. That's the one great buy.
The right fund for this job
Amanda Kish, our Foolish mutual fund guru, has been thinking along these same lines. In the new issue of the Fool's Champion Funds newsletter, available online at 4 pm ET today, she recommends a first-rate mutual fund that specializes in high-yielding dividend stocks.
It's a great find, with a veteran management team, reasonable fees, and a very impressive track record of success during previous bear markets. If you're looking to wade back into the stock market, but you want to stack the odds in your favor without doing hours and hours of research, this fund deserves your attention.
So what is it? I don't want to spoil the surprise. Read Amanda's article in the new issue of Champion Funds to get the whole scoop. Not a member? No worries -- a free trial gives you complete access for 30 days, with no obligation.
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