If ever investors needed a time to stay in the market, now's that time. Stocks have been on a decided downslide over the last couple weeks, as poor economic news buffeted and scared investors. But don't jettison your portfolio just yet!
Instead, you need to take a closer look at dividend stocks, which have been shown to outperform over time, especially in bear markets. I'm going to tell you where I'm putting my money next week, and offer you a chance to download a special free report from The Motley Fool.
Dividends to the future
When the market blows out, like it did on Thursday, with a 5% slide on the major exchanges, investors tend to engage in what psychologists call myopic loss aversion. In other words, they become so focused on potential losses over the next day, the next hour, even the next minute, that they forget the long-term prospects of their investments in order to eliminate the pain of losing money now. Research has shown that we experience the pain of losing a dollar two times as much as gaining a dollar, so we're quick to stanch the bleeding.
Rather than realize that powerhouses such as Coca-Cola and PepsiCo will be alive and kicking in 10 years and probably even more profitable than they are today, investors quickly shun the stocks in order to avoid a possible loss. Because of myopic loss aversion, investors tend to make irrational decisions, and fear grips their every choice. You saw it during the financial crisis of 2008 when investors were willing to lock in negative returns in exchange for having the safety of U.S. bonds. In fact, last year the government was able to sell five-year TIPS with an interest rate of -0.55%.
Over time, succumbing to this psychological bias means lower returns and more stress. And who needs more stress when dealing with investments? I'm guessing you don't either. But here's a little trick that I use.
Stay invested with dividends
To stay calm in times like these, I focus on the yields from solid and reasonably priced dividend stocks such as Coca-Cola, PepsiCo, and the three companies that I'm going to highlight below. Because you're investing for dividends, you have to stay invested to receive their payouts. And since you can't time the market, you'll never be able to tell when a stock or the market starts to move up for good. That's exactly the type of psychological bolster that you need in order to remain in the market during rocky times and buy more when stocks go on sale.
You can also take solace in the fact that dividend stocks tend to have lower volatility, meaning they won't go down as fast as the overall market. With this mindset, you start to look for good long-term opportunities to profit, rather than simply avoiding losses.
So below are the three companies trading at reasonable valuations that I'll be adding more of next week.
Vodafone (NAS: VOD)
Brookfield Infrastructure Partners (NYS: BIP)
National Grid (NYS: NGG)
Source: Capital IQ, a division of Standard & Poor's.
I love investing in special situations, and that's just what we have with Vodafone. The U.K. telecom giant owns 45% of Verizon Wireless, a joint venture with Verizon (NYS: VZ) , which owns the remaining 55%. As I and other analysts theorized would happen, the joint venture decided to pay out a dividend to its owners, a $10 billion move that will occur in January. Vodafone's take comes to $4.5 billion, of which it plans to pay out some $3.3 billion to investors in February. The rest will go toward paying down debt.
That special dividend amounts to an extra 2.4% yield on top of the 5.3% the company is already paying. And there's more good news for Vodafone investors, since some analysts think the Verizon Wireless dividend will continue. That could mean that Vodafone's combined yield of 7.7% could be here for a while. Given the strength of Vodafone's business and the potentially robust dividend, it makes other high-yield dividends like that of Frontier Communications (NYS: FTR) less attractive. Add in the fact that Frontier is focused on the declining fixed-line business and Vodafone on higher-growth wireless operations, and the trade down in yield to Vodafone looks interesting.
I highlighted Brookfield Infrastructure earlier this year as one of 11 incredible dividend stocks, and I'm sticking to my guns. The company owns interests in some of the world's best hard assets, including ports, power transmission, timber, and coal terminals. These vital assets have high barriers to entry and give the company the ability to extract rising rents year after year. This diversity of assets sets the company apart from more narrowly focused utilities such as Duke Energy (NYS: DUK) and Empire District Electric (NYS: EDE) . With regulated or contractual sales accounting for 77% of cash flow, the company has a stable profile.
Brookfield's recent quarter provided a lot to like. The company saw funds from operations -- a key measure of profitability for limited partnerships -- increase 96% year over year. On a per-unit basis, earnings growth came to 33%. Those types of numbers should help the company maintain its targeted distribution growth of 3% to 7% per year.
Finally, I'm going to pick up shares of National Grid next week. I added shares earlier this year, calling the company "an outstanding dividend stock" before it went on a tear. In addition to the high yield and low P/E, the stock offers many of the same attributes that I find attractive about Brookfield. National Grid operates power and gas transmission system in the U.S. and U.K. The company gets paid whenever electricity or gas runs through its network, giving it a toll-road-like business.
Like Brookfield, its hard assets provide a backstop to the company's valuation, and the company even has service prices that adjust to inflation in the U.K., where it earns some 60% of its profit. With U.K. infrastructure rapidly decaying, National Grid has many opportunities to increase its investments, and management has promised 8% dividend growth over the next two years.
Foolish bottom line
I know it's a tough time to stay invested in the market, but focus on your dividends like I do and look to buy more when your stock become cheaper. Consider adding the three stocks above to your portfolio along with the 13 names from a free report from Motley Fool expert analysts called "13 High-Yielding Stocks to Buy Today." Tens of thousands have requested access to this report, and today I invite you to download it at no cost to you. To get instant access to the names of these 13 high yielders, simply click here -- it's free.
At the time thisarticle was published Jim Royal, Ph.D., owns shares of Duke, National Grid, Brookfield Infrastructure, Frontier, and Vodafone. The Motley Fool owns shares of Coca-Cola, PepsiCo, and Brookfield Infrastructure.Motley Fool newsletter serviceshave recommended buying shares of National Grid, Vodafone, PepsiCo, Brookfield Infrastructure, and Coca-Cola.Motley Fool newsletter serviceshave recommended creating a diagonal call position in PepsiCo. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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