These Stocks Are Your Friends During a Market Downturn | Smart Switch: Personal Finance

(Maurie Backman)

It’s been a really rough ride for investors these past few weeks. Stock values ​​have slumped since the second half of April, and that’s on top of the losses investors were already seeing in their portfolios from the volatility earlier in the year.

At this point, it would be premature to say that we are in the midst of a stock market crash. But it is definitely fair to say that we have sunk into a bear market. And that can be unsettling, whether you’re a new investor or have held a stock portfolio for years.

If you are worried about a complete market crash, there is one type of stock that might be worth loading or holding.

Image source: Getty Images.

The benefit of dividend stocks

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It is estimated that more than 400 companies within the S&P 500 index pays dividends to investors. If you want to protect your bets during periods of volatility, dividend stocks are a good option.

Companies that pay dividends tend to do so quarterly. That means that even during periods of general stock market sluggishness, you can expect those predictable payouts.

Here’s another way to put it: Companies that pay dividends tend to do so even during periods when their stock price is down. That gives you options as an investor. You can take your dividend payments and use them as cash if you need money. That could, in turn, make it possible to leave your portfolio alone and avoid liquidating investments at a loss when they’re down.

If you don’t have a pressing need for cash, it’s a good idea to reinvest your dividends. And that could help boost your portfolio’s total return or minimize the hit you take when market conditions aren’t so favourable.

How to choose the right dividend stocks

If your goal is to secure a steady stream of dividend income, consistency is key. As such, you’ll want to look at companies that have paid (or better yet, increased) their dividends consistently over the years.

One thing you don’t necessarily want to do is chase the highest dividends out there. Higher dividends do not necessarily imply that a given company is doing better financially than its competitors or that it has greater growth potential. In fact, it’s easy to argue that companies with higher dividends may be limiting their growth by not reinvesting enough in their respective businesses.

For the most part, however, companies with a strong track record of paying dividends are established businesses with strong financials behind them. And if you’re looking for a way to ride out a stock market crash, be it short-term or long-term, then it’s worth considering loading your portfolio with dividend-paying stocks.

Another option worth considering if you’re focused on dividends are REITs, or real estate investment trusts. REITs are required to pay 90% of their taxable income as dividends to shareholders. If your portfolio currently lacks real estate stocks, you’ll get the added benefit of diversification. That could also be critical to riding out a stock market crash.

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