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Last Monday, I discussed the Hindenburg Omens that were reported over this summer. If the market crashes as the technical gurus expect it will, it’s not mandatory to sell all your stocks. In fact, if you hold the right stocks, you could simply cash in some great dividends during the market turmoil and your portfolio value will come back once the storm is over. The key is to select companies that are ready to face the storm and ride the waves. This is why I created this list of 11 stocks to hold during the next market crash.

What You Should Look at in an Overheated Market


(Click to enlarge)

Many readers sent me the same question by email: I’m sitting on cash right now and I don’t know what to do. Will the market crash? Should I buy in while we are at a peak?

This is a very hard question to answer. We may be sitting on a peak or we may reach new highs for another 12 months. The truth is that we can’t really know. The only thing we are 100% sure is that if you sit on the sidelines, you will be making 1.50% at best in a money market fund and don’t know when you will be able to jump back into the market (imagine if it keeps going up for another 12 months!). What you can do is to pick the right stock in an overheated market. Stock that will continue to pay dividends and that will be able to go through a recession without too much damage.

Therefore, you should look at stocks generating a lot of free cash flow so they can continue to pay their dividend and maybe even increase it. I also like stocks that are a little bit undervalued or fairly priced.

This is why I’m looking at stocks with a P/E ratio under 17. Over 15, stocks are usually not priced at a bargain. But in an overheated market, 17 seems reasonable. Companies like Procter & Gamble (NYSE:PG), Colgate Palmolive (NYSE:CL), Kimberly-Clark (NYSE:KMB), Kellogg (NYSE:K), Johnson & Johnson (NYSE:JNJ), Coca-Cola (NYSE:KO), Texas Instruments Inc (NASDAQ:TXN), Waste Management (NYSE:WM) are all great dividend stocks but are currently trading with P/E ratios over 19. We can say the taste for dividend payments increased with the low interest rates!

The next metrics I look at are related to cash flow. I used the following filters to do my research: positive free cash flow, cash flow dividend payout ratio under 90% and a stock buyback program. I already discussed using the free cash flow dividend payout ratio instead of using the classic method. This method could take longer to calculate but I was lucky enough to have it on Ycharts. Here’s the formula for using the cash dividend payout ratio:

Cash Dividend Payout Ratio = Common Stock Dividends / (Cash Flow from Operations – Capital Expenditures – Preferred Dividends Paid)

Share buyback programs are also very useful to maintain a higher stock value. It’s a good usage of funds when the whole market is going down.

Finally, my last metric was … dividend yield! Since the market has gone up by more than 20% since January, I used a current dividend yield over 2.50%. I usually aim for 3% + but right now, there are several great dividend stocks under this radar.

Here’s the top list of stocks to hold during the next market crash.

Apple (NASDAQ:AAPL)

Apple isn’t considered a dividend stock yet but it will definitely become one … just trust me on this! Hahaha! More seriously, this company has so much money in cash it can make it through any storm. The headwind it was facing for a while seems to have slowed down as the stock is up by 22% in the past 2 months. I believe Apple will raise its dividend again in the future and will definitely pay more than 2.50% ... on my cost of purchase anyways!

BlackRock (NYSE:BLK)

Those who were courageous enough to hold BlackRock during the 2008 market crash know that it can ride the storm. The company held its quarterly dividend at $0.78 back in 2008 and increased it several time to reach $1.68 per share (quarterly) in 2013.

CA Inc (NASDAQ:CA)

Since CA’s core business is to manage complex IT environments and make them more flexible, we can forecast a great future for such a business model. At a relatively low P/E ratio, CA could not only offer a great dividend payout in the future but also offer stock value gains. Their cash payout ratio is relatively low (44%) and the stock is currently paying 3.42% in dividends.

Lockheed Martin (NYSE:LMT)

I thought that with 80% of their revenues coming from the U.S. government, Lockheed Martin would suffer from any budget cuts. Since the U.S. gov’t debt is a major issue, I was expecting LMT to slow its activities a bit. Instead, the stock continues to reach new highs while maintaining great metrics. With a P/E ratio at 13.73, the stock seems fairly priced and benefits from strong cash flow.

Wells Fargo (NYSE:WFC)

I’ve already highlighted Wells Fargo as one of my favourite U.S. financial stocks. The credit crisis seems behind it and the company is looking forward. The dividend yield is lower than others on this list (2.92%) but it is sitting on a very low cash payout ratio (11%). Therefore, I wouldn’t be surprised to see more dividend increases in the future.

Wal-Mart (NYSE:WMT)

Wal-Mart suffered from a very high valuation in the 90’s and didn’t give much to its investors during that period. It seems that history is NOT repeating itself this time as the stock is currently valued at a 14.22 P/E ratio. I’ve purchased WMT a few weeks ago as I strongly believe that in an economy where people are looking to save their pennies, Wal-Mart will be the first store to benefit from it!

Western Union (NYSE:WU)

Western Union benefits from its leadership position in this market to dictate pricing and keep customers trust. Did you know that 10% of Americans don’t have a bank account? They must rely on money transfer services offered by WU. This is another stock showing a dividend lower than my 3% minimum requirement (2.85%), but if the recession hits again, Western Union will definitely benefit from more money transfers than ever. Mobile money transfer is also a new usage of technology that WU will benefit from.

Exxon Mobil (NYSE:XOM)

You can’t go very far without ignoring gas companies. While I currently hold Chevron (NYSE:CVX), my research shows that Exxon Mobil is in a better cash position to hit a recession. There isn’t much risk with Exxon Mobil with a P/E ratio under 11. Its cash flow is good and it is using over 4 billion in share repurchases. At 2.89% dividend yield, the stock is in good shape to hit 3% if you hold it longer than a year!

Three Canadian Stocks

While the Canadian stock market is less entertaining these days, I still wanted to dig in my own sandbox to see what I would find. There are three companies that are worth taking a look before any market crashes at the moment:

Intact Insurance (OTCPK:IFCZF)

IFC is a big insurance player in Canada. The company started its dividend policy back in 2009 and has increased it four times since them (each year). You can bet on another dividend increase for 2014! The company was hit by two tragedies this year (the flood in Alberta & the train crash in Lac Mégantic). Nonetheless, it was able to top analysts’ profit estimates.

Telus (NYSE:TU)

Telus shareholders (like me!) just received their Christmas present in advance: Verizon (NYSE:VZ) isn’t going into the Canadian market this year. After they bought Vodafone’s 45% stake in their company for the nuggets of $135B, Verizon has announced it will not pursue entering into a new market. This leaves Telus and its Canadian competitors [Bell (NYSE:BCE), Rogers (NYSE:RCI) and Shaw (NYSE:SJR)] in their cozy playground. Margins will continue to be high, cash flow is more than sufficient and Telus pays a 4.21% dividend.

TD Bank (NYSE:TD)

If we talk about the Canadian market, we have to talk about Canadian Banks. The only bank meeting my demanding cash flow requirements for this research is the TD Bank. TD has been quite active in the banking industry for the past 10 years and outperformed the Big 5. My only other choice would have been National Bank (NA), a Supra Regional bank in the province of Quebec due to their surprising results during the same period of time.

Source: 11 Stocks To Hold During The Next Market Crash