7 Dividend Stocks for a Bear Markethttp://www.fool.com/investing/dividends-income/2008/07/22/7-dividend-stocks-for-a-bear-market.aspx James Early
July 22, 2008
Merrill Lynch says we're in a recession. Unemployment is zooming upward, but nonetheless, some investors will come out on top. I'll show you what academia says is the smart move now -- and give you seven stocks to check out -- but first, let's tackle one important question: Will your portfolio take a nosedive?
Probably, yes, it will
So you should just get out of stocks, right?
That's much harder -- and less wise -- than it seems: Academic studies have shown that timing the market doesn't work. Stocks don't price in news in a consistent, predictable manner, which means investors tend to be worse off for guessing when to get in and out of stocks. There are better moves than attempting to time the market.
Dividends dominate downturns
Dividend investing itself is a frighteningly powerful force: Wharton professor Jeremy Siegel calculated that from 1872 to 2003 -- a period encompassing numerous recessions -- a full 97% of the market's return came from reinvesting dividends. Just 3% came from capital gain on the original principal. I pursue dividend stocks in my Motley Fool Income Investor service for this simple truth: Dividend stocks are the smart place to be at all times.
Even in a recession? Dividend stocks are especially the place to be in a recession, according to research from academics Kathleen Fuller and Michael Goldstein. One of the duo's papers, "Do Dividends Matter More in Declining Markets?", found that when the overall market declines, dividend stocks outperform non-dividend-paying stocks by an additional 1% to 1.5% per month!
Moreover -- and if nothing else has gotten your attention, this will -- Fuller and Goldstein found that dividend stocks outperform with less risk. Better returns, less risk, and strong performance in a recession. Can we do any better than that with dividend stocks?
Look to the horizon
SG Equity Research divided European stocks into five brackets, according to dividend yield. Societe Generale researchers found that from 1985 to 2007, stocks in the top 20% by yield returned more than 17.5% annually, whereas the lowest-yielding bracket returned closer to 6% annually. [Insert video game failure music here.] Simple study, simple lesson: It pays to dig the high payers. But, uh, where exactly can we find them?
Since I'm looking for such stocks all the time at Income Investor, I'll start you off with a few options below, courtesy of stock-screening software Capital IQ. All have yields greater than 2.5%, have raised their dividends in the last year (because a payout hike is a special sign of strength), and sport at least some revenue growth. These aren't necessarily recommendations, but they are interesting starting points for further research.
Domestic dividend divas