3 Key Bear Market Rules, 5 Bargain Buys and a Monthly Dividend Portfolio

Richard Moroney is the editor of Dow Theory Forecasts, a financial newsletter that has been published continually since 1946. Here, the blue chip investing expert and contributor to MoneyShow.com highlights his top rules to survive a bear market, some top year-end stock bargains and a simple strategy to choose stocks that provide monthly income. With the Dow Theory turning bearish, as it did on Dec. 14, when the Dow Industrials closed below their November low, investors must alter their view of the market somewhat. We're not suggesting a leap off the train, or anything else similarly drastic, just keeping your expectations realistic. With those investor expectations in mind, we present three big don't rules that apply for all bear markets, not just this one: 1. Don't assume you can predict how long the bear market will last. You don't know, we don't know, and nobody else knows, either. We've been observing the market for decades, and there's simply no way to be sure how much time it will take to reverse a downtrend. 2. Don't sell everything and go to cash. Selling out may feel like a good move, but in reality you're doubling down on market timing. We recommend reducing the market exposure of your equity portfolio to 70% to 80%. This won't allow you to avoid losses entirely, but will help you weather the storm. The big sell only makes sense if you know exactly when the market will turn, and thus buy everything back at the bottom (see No. 1 for more on this topic). Guess wrong about the turn in the market, and you could miss out on the recovery. 3. Don't forget fixed-income. In our view, the clearest path to living through bear markets is a sensible long-term asset allocation. Do you own enough fixed-income and other nonequity investments to suit your age, wealth and return requirements? If so, raise some reserves in the equity portion of your portfolio and ride out the storm in a diversified portfolio of high-quality stocks. If the downturn continues, you've partially insulated yourself. And when the upturn comes -- as it always does -- you'll participate in it. The S&P 500 Index has tumbled significantly from its record high set on Sept. 20. The five recommended stocks listed below have fared even worse than the broad index. That weakness leaves these stocks looking unduly cheap, all trading at least 20% below their median trailing P/E ratios over the past five years. Apple Centene Citizens Financial Group Marathon Petroleum Southwest Airlines It can be difficult to buy stocks that seem to be in free fall, especially those facing legal uncertainties or operating in cyclical industries that would feel the brunt of the pain of an economic downturn. But, encouragingly, growth prospects for each of these stocks listed above still look solid, with per-share profits projected to rise at least 10% in fiscal 2019. Meanwhile, we note that sometimes the most straightforward advice isn't the best advice. Take the issue of monthly dividends. Search the internet for monthly dividends, and eventually you'll find a list of stocks that pay out every month. Don't fall into that trap. We know of 30 U.S. stocks that pay dividends every month. All but two are either energy companies, asset managers or real estate investment trusts (REITs). All but five have stock-market values below $5 billion. None of them offers the mix of fundamental strength, attractive valuation and dividend-growth potential that warrants inclusion on one of our recommended lists. Investors who build portfolios from those 30 every-month payers would be taking on more risk than they want in exchange for subpar total-return potential -- all to accomplish a goal they could reach using a diversified basket of higher-quality stocks. Here are three ways investors can generate solid monthly income from an investment portfolio: 1) Step up exposure to fixed-income securities, such as bonds. Over time, bonds tend to underperform stocks, but their returns are less volatile and their income streams easier to predict, in terms of both absolute dollars and payout dates. 2) Sell stocks periodically to generate cash flow. This strategy makes the most sense for investors who require more income than their stocks provide. If you instead seek out higher and higher yields, you'll probably end up with an increasingly concentrated portfolio, exactly the opposite risk profile desirable for retirement years. The sell-every-month strategy tends to grate on equity investors used to holding for the long term, but both history and logic suggest that regardless of your income needs, maximizing total returns (capital gains plus dividends) is the best way to ensure that your portfolio lasts as long as you do. 3) Build a portfolio of quarterly dividend payers that provides income every month. The table above provides an example of such a portfolio, comprised of high-quality stocks from all over the market. Unfortunately, the vast majority of investors will never build enough wealth to support themselves entirely from stock dividends. A $1 million portfolio yielding 5% will provide $50,000 a year in dividends, which is about what the average baby boomer claims to need for retirement. Sounds pretty good, right? In theory yes. But the Federal Reserve estimates that only about one in every 25 households has a net worth of more than $1 million. And in order to generate a yield of 5% from a stock portfolio, you'd have to take a massive amount of risk. A more sensible portfolio might provide a yield of 2% to 3%, which means you'd need a lot more money to cover your costs. And even if you can live on your dividends, what about five years from now? Portfolios too heavy on fixed income and high-yield/low-growth stocks may not provide the dividend increases you require to keep up with inflation. Consider the dividends every-month portfolio presented below as an effort to tap the best of all worlds -- safety (diversification), income (only dividend-paying stocks), and long-term growth (stocks capable of posting operating growth, which in turn can fuel dividend growth as well as capital gains). Dividend paid January, April, July and October Comcast - yielding 2.0% Comerica - yielding 3.1% FedEx - yielding 1.2% Hewlett-Packard Enterprises - yielding 3.0% JPMorgan Chase - yielding 3.0% National Fuel Gas - yielding 3.1% U.S. Bancorp - yielding 2.8% UGI - yielding 1.8% Dividend paid February, May, August and November AbbVie - yielding 4.7% Apple - yielding 1.7% AT&T - yielding 6.5% Caterpillar - yielding 2.7% Citizens Financial - yielding 3.1% CVS Health - yielding 2.5% Nucor - yielding 2.5% Verizon Communications - yielding 4.1% Dividend paid March, June, September and December Ameren - yielding 2.7% Chevron - yielding 3.8% Discover Financial - yielding 2.4% Intel - yielding 2.5% Lam Research - yielding 2.9% Marathon Petroleum - yielding 2.9% Phillips 66 - yielding 3.5% Target - yielding 3.7%

3 Key Bear Market Rules, 5 Bargain Buys and a Monthly Dividend Portfolio

Dow Theory presents tips for surviving a bear market, some top year-end stock bargains and a simple strategy for monthly income.

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