These stocks are your friends during a market crash | Smart Change: Personal Finance

(Maurie Backman)

It has been a very rough ride for investors in recent weeks. Share prices have plummeted since the second half of April, in addition to losses investors have already seen in their portfolios due to volatility earlier in the year.

At this point, it would be premature to say we are in the midst of a stock market crash. But it is certainly fair to say that we are plunged into a down market. And that can be troubling whether you’re a new investor or have had a stock portfolio for years.

If you’re concerned about a full-blown market crash, there’s one type of stock that can pay off — or hold.

Image source: Getty Images.

The advantage 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 hedge your bets during periods of volatility, dividend stocks are a good way to go.

Companies that pay dividends usually do so on a quarterly basis. That means you can look forward to those predictable payments even during periods of general sluggishness in the stock market.

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

If you don’t have an urgent 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 blow needed when market conditions aren’t as favorable.

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 steadily paid (or better yet, increased) their dividends over the years.

One thing you don’t necessarily want to do is chase the highest dividends out there. Higher dividends don’t necessarily mean that a particular company is outperforming its competitors financially or that it has more growth potential. It is even easy to argue that companies with higher dividends can limit their growth by not reinvesting enough in their respective activities.

For the most part, however, companies with a solid history of paying dividends are established companies with strong financial standings. And if you’re looking for a way to get through a stock market crash — short-term or long-term — it pays to consider filling your portfolio with dividend-paying stocks.

Another option worth checking out if you’re focusing on dividends is REITs or real estate investment trusts. REITs must pay 90% of their taxable income to shareholders as dividends. If your portfolio does not currently include real estate stocks, you will reap the added benefit of diversification. That too could help weather a stock market crash.

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