Editors' pick: Originally published Jan. 20.
Major U.S. averages are falling further and further in 2016 as investors remain concerned about weak economic data out of China and the continuing decline of crude oil prices. Now that volatility is the norm rather than the exception, investors can take steps to become better positioned and prepared for the bear market.
Right now is not the time to be optimistic and hopeful for a comeback with the worst performing names in your portfolio. Only stick with the positions you have the most confidence in for the long haul. Ask yourself, "If my portfolio was 100% in cash right now, how would I invest it?" If it's not something you would buy today, sell it immediately and pare your losses.
In every bear market cycle, there will always be quality investments to choose from. It's important to check the quality of earnings and to take a closer look at corporate fundamentals. When considering dividend payers, analyze levered free cash flow as a percentage of current dividend payments, study cash positions, and evaluate the longevity of business plans to ensure companies are healthy enough to maintain and even increase their payouts on a consistent basis. Now is not the time to risk capital on business fads -- it's time to stick with those solid names you can trust through the good times and the bad.
Seek out funds and ETFs that offer an alternative, non-correlated source of return. Specifically, look for funds with long positions in the quality names that also have the ability to short underperforming sectors or companies. Alternative investments can both protect as well as add returns during choppy markets like the one we are facing.
Here are 10 dividend stocks to consider, based on how likely they are to maintain or raise dividends.
Reality Shares' DIVCON rating system ranks companies based on their future dividend health prospects. The top companies, which we (I am co-founder, president and CEO of Reality Shares) call the DIVCON Leaders, tend to have strong free cash flow, solid balance sheets, and a continued willingness from management and the board to increase dividends in the future. The companies tend to move in tandem with the broader market when times are good, but they exhibit more defensive characteristics when times are difficult. This is evidenced by the 100% upside capture and 80% downside capture exhibited by the DIVCON Leaders Dividend Index over the 15-year period from 2001 through 2015 (on a back-tested basis).
Conversely, the worst scoring companies, which we call the DIVCON Laggards, have historically exhibited weak balance sheets and fundamentals, and have tended to underperform on the downside. The DIVCON Dividend Defender Index, which is 75% long the Leaders and 25% short the Laggards, has historically delivered strong risk-adjusted returns over most market cycles (from 2001 through 2015, on a back-tested basis).
The top 10 positions in the DIVCON Leaders Dividend Index are:MCK data by YCharts
BRCM data by YCharts
2. Broadcom Corp. (BRCM)WM data by YCharts
TSN data by YCharts
SBUX data by YCharts
SYK data by YCharts
VLO data by YCharts
TIF data by YCharts
More information on the Reality Shares Indexes can be found here.
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