Three Small Caps to Help Weather a Bear Market
The third quarter of 2015 was a bad one for the market. The S&P 500 fell 7%, its worst performance in four years. In the third quarter of 2011, the S&P 500 dropped 14%. It then rallied in the fourth quarter to finish the year exactly where it started. If you include dividends, you made a few percentage points.
And since that drop in 2011, the market has gone on to climb 99%. So the recent decline in stock prices doesn’t automatically mean you’re destined to move in with your children and take a job bagging groceries to pay the bills.
On the other hand, just because the market doubled the last time there was a significant slide is no guarantee it will happen again. At some point, maybe even in the near future, a bear market will rear its ugly head.
And when it does, you must be prepared. Not by selling everything you have, but by owning a few stocks that should hold up well in a rough market.
Bearing the Bear Market
Receiving a nice dividend yield will help you during the bad times. Not only will your investments spin off income, but that income also will be perceived as valuable by other investors and will help the stock hold up better than many that aren’t dividend payers.
And during bear markets, the total returns of dividend payers are typically better than those of their peers that don’t pay dividends.
Below are three stocks with attractive valuations, increasing cash flow and a history of dividend growth – stocks that will help your portfolio weather a bear market and enable you to sleep at night.
- Maiden Holdings (Nasdaq: MHLD) – This Bermuda-based reinsurer has raised its dividend every year since 2008. Even during the financial crisis, the company hiked the dividend. It trades at under 10 times earnings and less than seven times forward earnings. Next year, earnings per share is expected to soar 28%. The company pays an attractive 3.8% dividend yield.
- Main Street Capital Corp. (NYSE: MAIN) – This business development company (BDC) invests in and lends money to other businesses. Its 7.8% yield is made even more attractive by the fact that the dividend is paid monthly. The company has raised its dividend for each of the past five years. BDCs measure their profits in net investment income rather than earnings or net income. Main Street’s net investment income is up 14.3% through the first half of 2015.
- Stage Stores (NYSE: SSI) – Stage Stores operates retailers Bealls, Goody’s, Peebles and others. The stock was creamed in August after a disappointing quarterly report. That being said, earnings are still expected to rise nearly 10% next year. The stock trades at a price-to-earnings (P/E) ratio below 10. It has raised its dividend every year since 2010 and it generates ample cash flow to pay the dividend. Plus, because the stock dropped so much, the dividend yield is a sky-high 6.1%.
These three stocks, which you may not have heard of before, should stabilize your portfolio in the event of a prolonged downturn.
Owning cheap stocks with strong yields that raise their dividends is the best way I know of to handle a bear market.
Hoping your longs go up and your shorts go down,
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