Save Yourself From America's Downfall

This article is part of our series on options investing, in which The Motley Fool is sharing a number of strategies you can use to get better results from your investment portfolio.

Are you prepared for "riots in the streets, arrests on an unprecedented scale, and martial law?"

Me neither.

But if you've watched Porter Stansberry's "The End of America" video, you may think it’s just around the corner.

Some of the points he makes are valid, though others are clearly hyperbole. This column will help you sort through which is which.

Then, I'll offer some investment ideas -- including an options strategy -- you can use to profit if a pullback comes.

"An even bigger crisis is lurking"
Stansberry's core argument is sound. He points out that the problems that devastated our financial system have not disappeared -- they've simply moved onto the U.S. balance sheet. And as most of us know, this balance sheet wasn't in the best shape to begin with.

But because the U.S. can pay its bills so long as it can continue printing money, and so long as the U.S. dollar remains the world's reserve currency, all is fine and dandy.

A crisis could come when the rest of the world refuses to accept payments in U.S. dollars, or refuses to pay for things like commodities with U.S. dollars. Stansberry asserts that this is already afoot -- but it's not quite as dire as he would like you to believe.

Yes, there’s talk of a "global reserve currency" as big U.S. debtholders like China are diversifying away from Treasury bonds. But it's hard to make the case that the U.S. dollar will disappear as the world's reserve currency within the next few months to a year, as Stansberry predicts.

Even so, you can profit
Though it may not be as dramatic as Stansberry envisions, another market downturn could still arrive -- meaning you should begin to think of how to protect your portfolio and profit from a significant pullback.

Stansberry doesn't reveal all his suggestions -- he's trying to sell subscriptions, after all -- I was able to reverse-engineer a few of his recommendations.

One of his top recommendations is to purchase a working farm. Although the dreamer in me agrees (it's my long-term goal to retire as a hobby farmer), and to a certain degree it makes sense, I think this investment is outside the realm of most investors.

He also recommends investors buy gold and silver. It's clear he's partial to gold coins and physical precious metals, as opposed to the SPDR Gold Trust (NYSE: GLD  ) and the iShares Silver Trust (NYSE: SLV  ) .

But as we've seen, gold and silver prices are extremely volatile. And physical assets are hard to sell -- meaning that even with their minimal protection, it can become impossible to make money if you can't find a buyer or if you have to pay a commodity broker a hefty commission.

One alternative is to purchase financially sound dividend-paying large caps. Many companies actually increased dividend payouts during the last market downturn. I'm reasonably confident that some could do the same again.

Here are five companies I would look into that either maintained or raised their dividends through the last downturn.

Company

Market Cap

Current Dividend Yield

5-Year Compounded Annual Growth Rate of Dividends

Yum! Brands (NYSE: YUM  ) $23.9 billion 2.2% 32.2%
Texas Instruments (NYSE: TXN  ) $30.1 billion 2.5% 34.7%
UnitedHealth Group (NYSE: UNH  ) $49.0 billion 1.4% 78.1%
McDonald's (NYSE: MCD  ) $87.7 billion 3.2% 28.9%
IBM (NYSE: IBM  ) $192.7 billion 1.7% 24.6%

Data from Capital IQ, a division of Standard & Poor's.

An options strategy you can try
The final strategy Stansberry recommends is an options strategy. Based on various quotes he provides, I'm pretty sure he's advocating selling put options.

By writing put options, you get paid a premium for agreeing to buy the underlying stock if it falls below a certain level by a given date. If the put is not trading below that level by the exercise date, then you pocket the money.

He touts this as an easy way to pocket 100% gains over and over again without ever touching a stock -- which is technically possible.

That being said, there are risks. You can probably guess where the problem lies -- if the stock falls drastically below the agreed-upon price, you are still committed to buying the stock at the agreed-upon price. Which means that it could take months, if not years, to recover if the stock tanked.

This doesn't mean you should dismiss writing puts altogether. But it does mean that you should be judicious about which companies' stocks you write puts on. Companies like the dividend-payers I mentioned above could make good put-writing candidates.

It should also remind you that it's risky to merely speculate with these trades. Make sure you write put options only on companies you'd actually be comfortable owning at the right price.

Stay tuned throughout our options investing series and get the strategies you need to earn more from your investments. Start with the series intro for links to the entire series.

This article has been updated since its original publication on June 9, 2011.

Adam J. Wiederman owns no shares of the companies mentioned above. The Motley Fool owns shares of IBM, Yum! Brands, UnitedHealth Group, and Texas Instruments. Motley Fool newsletter services have recommended buying shares of McDonald's, UnitedHealth Group, and Yum! Brands, as well as creating a diagonal call position in UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 29, 2011, at 7:06 PM, TMFHousel wrote:

    <<He points out that the problems that devastated our financial system have not disappeared -- they've simply moved onto the U.S. balance sheet.>>

    Total economy debt -- private and public -- has actually been declining since 2007. The private sector is shedding debt faster the the public sector can go into it.

  • Report this Comment On September 29, 2011, at 8:47 PM, DDHv wrote:

    A small working farm may be beyond most people's possibilities. Some vegetable plants are not. We've been using intensive gardening for several decades, and most people would not believe what we are getting from our back yard. Even someone in an apartment can use windows and containers to grow a few plants!

    As long is you keep the quantity below what your own family uses, the return on investment is very high

  • Report this Comment On September 30, 2011, at 7:22 AM, jch159 wrote:

    The idea is to RAISE CASH RIGHT NOW

    YUM with its paltry 2% div is not as good as VZ with its 5+% div

    fd: long puts yum

  • Report this Comment On October 05, 2011, at 9:29 AM, TMFDonauschwaben wrote:

    DDHv,

    I should've been clearer, but I meant to make a difference between a small working farm and a family garden.

    While I agree that home gardening may eliminate the need to buy vegetables (so long as you're adept at freezing and canning), the average American probably doesn't have the necessary skills to replace their protein intake.

    First, many homeowners associations bar residents from owning livestock -- even as small as a chicken. Secondly, the old traditions of slaughtering and butchering your own meat have long been forgotten.

    So while home gardening would admittedly help lower -- or eliminate -- vegetable costs, I don't think relying solely on what the average suburban garden produces is enough to provide a diverse meal.

    Then again, you and your kin may be hunters and fishers, in which case you'd probably be fine.

    That said, I have a feeling that over the next several decades, we will see a resurgence in many of these "forgotten skills" -- motivated by thrift, a desire to reconnect with our food and its origin, and a reconnection with our predecessors.

    Thanks for your comment,

    Adam

  • Report this Comment On October 05, 2011, at 9:34 AM, TMFDonauschwaben wrote:

    jch159,

    Actually, another interesting dividend play might actually be VOD.

    Currently yielding 5.5%, it gives more global exposure, while still providing VZ exposure (VOD owns a 45% stake in VZ).

    Hope that helps,

    Adam

  • Report this Comment On January 30, 2012, at 11:07 AM, StansberryCS112 wrote:

    If you have any questions about Stansberry and Associates, please do not hesitate to call customer service at 1-888-261-2693. We would be happy to assist you. We are open Monday – Friday 9-5 EST.

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