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Three Great Stocks To Protect Your Portfolio

Growth is slowing in the U.S., Greece is on the verge of leaving the Euro, and some economists are now predicting a recession this year. Add to that the possibility of the Fed finally raising interest rates and we have a recipe for a potential plunge in corporate earnings and the stock market.

I have been asked many times, where should I be invested if we do indeed have another recession? The easy answer used to be bonds. But with their paltry yields, this won't cut it for many investors.

We do have recent history to help guide us in terms of which companies can weather the storm of a recession and even keep their dividends growing. In the major downturn and recession of 2008-2009 there were actually several dividend-growth stocks that increased their dividends. These companies generally are non-cyclical in nature and sell staple items that people will not give up even in a recession.

I want to look at three such companies today. The are Procter & Gamble (PG), Kimberly-Clark (KMB), and Altria (MO).

Let’s take a look at what makes companies like these such a solid investment for retirement portfolios.

Company

Div. Yield

Div. Growth Rate
(5 Year Annualized)

Growth Of Dividend
(1/2008-12/2009)*

Change In Stock
Price (1/2008-12/2009)

Procter & Gamble

3.1%

8.3%

26%

14%

Kimberly-Clark

3.3%

7.0%

13%

8%

Altria

4.1%

8.7%

17%

0%

*Altria's dividend growth is from 3/08 through 12/09 to strip out the effects of their spinoff of Phillip Morris.

 

What is amazing about these three companies is how they increased their dividends during the dark days of the last recession. Most investors would be thrilled with above 15% dividend growth over any two year period. These three companies had more than that during a serious recession. Also of note, not one of these companies saw a share price decline during this time period while the S&P 500 fell by 15%.

There are three benefits to finding companies such as these: 1) Their dividend payments keep on rolling in, even in recessions (and sometimes even with dividend growth) 2) The stock prices usually do not decline as much as most equities in a recession and 3) the volatility of solid dividend-growth stocks is much lower than indexes such as the S&P 500.

I want to stick with the fact that dividend-growth stocks like the ones being discussed here are much less volatile over time. In this very informative article  the author shows that dividend-growth stocks have volatility levels that have historically been about 33% lower than non-dividend paying stocks. This makes sense because, in general, dividend payouts are much more stable than equity prices. If a stock derives, say half, of its return from dividends, then the volatility of its total returns will likely be much lower than non-dividend payers.

Given this, I looked at two separate portfolios in our retirement planner. The first portfolio invested only in an S&P 500 index fund. The volatility (standard deviation) for the S&P has been about 16% over the past 10 years.  I then replaced the S&P 500 fund with my dividend-growth stocks. I lowered their standard deviation assumption by 33%. So the standard deviation for my dividend payers is 10.7%.

In a typical retirement plan I find that the probability of success increases by about 20% when switching to less volatile dividend-growth stocks. This is a large jump, solely due to the fact that they are now invested in more stable, solid dividend paying stocks instead of an equity index fund.

Another huge benefit to investing in dividend-growth stocks for retirement is that the principal value of dividend-growth stocks becomes nearly meaningless if held long enough because their dividend payments become the major portion of the total return over time. So fluctuations during recessions do not impact investors nearly as much, either monetarily or psychologically.

Each person and couple has a different situation and might need to change a variety of things in order to meet their retirement goals. But it is usually impossible to tell whether or not you can retire when you want until you sit down and actually run through the numbers. At that point you can begin running interesting scenarios that will tell you what you need to do to get to your goals. 

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