5 Ideas in a Declining Market

Pick Value Stocks Now!5 ideas to hedge a declining market with high yield dividend stocks

"I lost $75,000 last month, "an investor lamented recently when discussing his investments. "I'm still up $50,000, but I wish I had been able to pull out sooner."

What can be done to boost a portfolio's bottom line when the stocks market seems headed downward? One way is to boost returns by buying high dividend paying stocks. The problem is that article after article on the internet warn investors to keep away from any stock paying over 10%. In a market correction as big as this most recent one, high yield stocks can help lessen the horrible drop in your bottom line. Here are five ways to determine whether the stock is right to add to your portfolio.

First, use several sources to determine the Price per Earnings (P/E) of the stock in question. Your online broker may have one number, and then another source such as MSN Money, Yahoo Finance or Morningstar will have another. A P/E under 20 is a good price for any stock, but a high yield dividend stock may have a P/E as low as 2. Shy away from any stocks that have a N/A or a negative number in the P/E column.

Second, use two sources to check the stock's dividend percent. Morningstar, for example, will often have a different dividend percentage than Schwab. If you truly want only the high yield to juice up your portfolio, select only stocks that pay over 8%. Also, check the history of the payout. Make sure the company has a history of paying each quarter, and, if possible, that the dividend stays the same or increases with each payment.
Third, ask your common sense why the stock is paying so much. Is it taking a temporary correction because the sector is correcting? Take British Petroleum Prudhoe Bay Royalty Trust (BPT). Recently it fell to earth after the price of oil dropped. It had gone all the way from $108 to the mid $70's in a very short time recently, thereby boosting the dividend yield. If an investor could have grabbed the stock at its recent low, they would have captured a yield over 10% as well. Common sense says that oil will probably go up again, and sure enough, investors didn't let BPT languish long. It soon zoomed up to over $88 in a matter of days.

Fourth, check financial information. Morningstar has a wealth of information designed to help you determine the health of the company and some of it comes in easy to understand graphs. Check to see if revenues have been increasing yearly, and if the net income has also been steadily growing. A negative net is reflected in parenthesis, and you don't need to weigh down your portfolio with speculation. Also, look to see if any insiders are trading the stock. See if the executives of the company are buying the stock. That's a great sign that the company's health is solid.

Fifth, understand the risks that the stock is facing. Take Royal Bank of Scotland (RBS), for example. It has phenomenal numbers: revenues that are rapidly increasing, a great P/E, and a mystifying dividend of 24%. A simple examination of the newspapers could tell you that some banks are having trouble. RBS might not be any different, but it also might be. First, the banks in trouble have been in the U.S. Second, a 24% dividend can put a lot of cash into your money market before the stock tanks, or could keep earning wonderful money for you as the stock begins to recover. It's a risk, but if you are willing to take a chance on a few thousand dollars, it could pay off handsomely for you.

Investing opportunities like these come seldom, it's true. But sector corrections come so frequently, that a savvy investor can constantly hedge the portfolio's bottom line with high dividend yield stocks. Use these five ideas to make smart stock picks and ease the pain of a downward market.