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I had agreed to meet her in a cafe, a little place downtown where we could be anonymous. I knew she was in danger. Grave danger.

But I didn't know how bad it was, until she started talking.

"I'm in cash," she said. She looked at me across the table. Her deep blue eyes were both proud and tentative. "I sold everything at the end of September."

She was hoping for my approval. She wouldn't get it. I sipped my quintuple espresso and waited.

After a minute she went on. "I'm going to wait until the market turns. It's too crazy for me." Her voice wavered, just a little.

I kept my face impassive. Holding cash in a recession is a dangerous business. The markets tend to turn when you least expect it, while the economy is still bad, and when they turn it happens hard and fast. Miss that first leg up and you could be chasing them for the rest of your life.

She needed help and she needed it right now. My kind of help.

I put my drink down. "You're in more trouble than you know. Those money market yields will kill your retirement hopes. I can make it better, but it's going to cost. It might seem scary. But it's the only way."

Her eyes widened. The facade was starting to crack. "But ... trouble? What can I do?"

"Get some dividend stocks in that portfolio. Today."

Why dividends are the answer
Here's the problem: The economy's bad and it might get worse. The market has crashed harder than a 22-car NASCAR pileup. Interest rates and Treasury yields are microscopic. All of this will turn around at some point, but nobody knows when.

Growth stocks could go far lower before starting their recovery. Bonds will give you income now but not much chance of capital appreciation later. Staying in cash is safe, but not much more profitable than stuffing the money in your mattress.

You know all that. But dividend stocks give you a way around it. If you buy the right dividend stocks, you get three things:

  • Dividends! Whether the stock's price goes up or down, you make money from those quarterly dividends. To my mind these are the perfect IRA investments -- reinvest the dividends, think long-term, and watch your balance grow. If you're reinvesting dividends, there's no need to lose sleep if the stock's price goes down further; the dividends will automatically dollar-cost average on your behalf. And over time, reinvested dividends plus the stock's price appreciation can add up to very impressive returns.
  • Low downside. If you buy established, well-run businesses with the ability to sustain their dividend payments through tough economic times, your downside is limited -- especially if you buy them at today's prices. Generally speaking, the prices of these stocks tend to be less volatile than those of the big-name highfliers, and the dividend gives you an extra cushion against any decline.
  • You'll be holding stocks when the market turns. Enough said.

And today's prices, as noted, have produced some eye-opening dividend yields. I just did a quick screen on Motley Fool CAPS for promising stocks with strong dividend yields. As a starting point for further research, you could do a lot worse than this list:

Stock

CAPS rating (out of 5)

Dividend yield

AGL Resources (NYSE: ATG  )

*****

5.8%

Anglo American plc (Nasdaq: AAUK  )

*****

6.7%

DuPont (NYSE: DD  )

****

6.9%

Gerdau (NYSE: GGB  )

*****

5.9%

Telekom Indonesia (NYSE: TLK  )

*****

8.5%

Seagate Technology (NYSE: STX  )

*****

10.9%

Ternium (NYSE: TX  )

*****

7.6%

At first glance, all of these have definite strengths. But as I said, this list is just a starting point for further research. Figuring out whether a company is a good buy in the face of a protracted recession isn't a simple business, especially with foreign companies. But it's not impossible. It's something we can do.

How? I'm glad you asked.

How to pick the best stocks
In this month's issue of the Fool's Rule Your Retirement newsletter, available online at 4 p.m. ET today, Fools James Early and Joe Magyer offer a complete tutorial in the art and science of investing in dividend stocks. James and Joe pick dividend stocks for a living -- they're the advisor and senior analyst, respectively, for the Fool's dividend-stock newsletter -- and their market-beating success speaks for itself.

If you'd like to get better at picking stocks for your IRA, this great article -- which assumes no special knowledge on your part, and includes several stock recommendations to get you started -- is a must-read. If you're not a Rule Your Retirement member, just help yourself to a free 30-day trial by clicking here. You'll have full access in seconds, with absolutely no obligation to subscribe.

Fool contributor John Rosevear, who has been spending a little too much of his spare time revising his first mystery novel, has no position in the companies mentioned. Telkom Indonesia is a Motley Fool Global Gains selection. Telkom Indonesia and AGL Resources are Motley Fool Income Investor recommendations. Try any of our Foolish newsletters free for 30 days. The Fool's disclosure policy smells the way the Taj Mahal looks by moonlight.


Read/Post Comments (2) | Recommend This Article (21)

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 December 05, 2008, at 12:34 PM, nerd1951 wrote:

    Economists will tell you that the stock market is a leading indicator; meaning it will turn before the recession is over. So, yeah, there's no way to time the market and win.

    Dividends, solid companies selling at a discount, and buying in a bit at a time are the only ways to make money in the long run in this climate. Perhaps a good strategy at any time, no? It's just easier to find discounted solid companies right now.

  • Report this Comment On December 05, 2008, at 1:31 PM, TMFMarlowe wrote:

    I agree -- a good strategy at any time. But at a time when many are inclined to cash out and hide what they have left, it's important to be reminded -- and of course, it's a great strategy when prices are low.

    John Rosevear

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John Rosevear
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John Rosevear is the senior auto specialist for Fool.com. John has been writing about the auto business and investing for over 20 years, and for The Motley Fool since 2007.

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