I receive a lot of questions about getting out of the market before the next economic recession or stock bear market. For many investors there is a constant fear that they will be too late to get out of stocks when the market starts into a deep decline, and much of their portfolio values will evaporate. Events of the last few months show how quickly sentiment and prices can swing in the stock market. There are also plenty of investment service providers that feed on those fears with their marketing programs.
I have watched and participated in the stock market for almost 40 years. That time has shown me that it is nearly impossible to predict when a small stock market correction is the one that turns into a deep bear market.
Jumping out of stocks at the start of every correction will just cause an investor to lose money and not participate in the next up leg for share prices. The near impossible task of timing market tops and the next bear market is one of the primary reasons I focus on dividend paying stocks.
Quality dividend companies will continue to pay through a recession and bear market, and history shows that dividend payers are among the first to recover following a steep market decline. My strategy is to be an owner of dividend paying stocks through the ups and downs and backups of the market. When share prices drop, I will buy more, boosting my dividend earnings and average yield.
However, some stocks are more defensive than others. If you see something that tells you a bear market is coming, one strategy is to sell your riskier high-yield stocks and shift your capital into more conservative dividend stocks. These are companies with rock solid balance sheets, and businesses that will continue to operate well right through any recession.
In a deep bear market, share prices of all stocks will go down, but these are the ones that you can confidently accumulate during the decline and boost your profits and income when the market recovers.
If you are thinking you need to get defensive with a portion of your stock portfolio, consider these three stocks:
Dominion Energy Inc (NYSE: D) is a $52 billion market cap utility company serving the mid-Atlantic states.
The company is vertically integrated to provide both natural gas and electric power to customers. Dominion Energy is a growth focused utility. The company plans to spend about $4 billion per year on growth projects, which will help grow earnings per share by 5% to 6% per year for the foreseeable future.
Management forecasts dividend growth of greater than 6% per year through 2020 at least. As a final benefit, utility stocks are viewed as some of the best investments in an economic recession, so as the economy gets works, utilities like Dominion Energy will become more popular with investors.
The stock currently yields 4.8%.
The defensive appeal of Easterly Government Properties (NYSE: DEA) is that the company’s properties are 100% leased to U.S. Federal government agencies.
This REIT is growth focused, with a business plan to steadily acquire facilities needed by those agencies that are also growing, such as Veterans’ Affairs, the FBI, and Homeland Security.
Since its early 2015 IPO, the company has increased its owned properties by 150% to a current 65. New properties go on long-term leases with selected agencies. Leases have built in rent escalators.
Since the IPO Easterly Government Properties has increased its quarterly dividend six times. Going forward investors can expect 4% to 6% annual dividend growth.
The stock currently yields 6.1%.
Aircastle Limited (NYSE: AYR) is distinguished from most higher yield stocks by the tremendous cash flow coverage of the current and growing dividend. The company owns a fleet of about 200 commercial aircraft that are leased to airline companies around the world.
Over the last year Aircastle has paid dividends of $1.14 per share against earnings of $2.59 per share. In addition, the bottom line EPS under-reports free cash flow per share by at least 50%. As a result, this stock has much better cash flow coverage of the dividend compared to pass-through companies like REITs that must pay out 90% of net income as dividends.
You can expect AYR to grow the dividend by 7% to 9% per year. The shares yield 6.0%.