Why Sell-Off In 2012 Will Be Less Painful Than In Past 2 Years

 |  Includes: LINEQ
by: Roger S. Conrad

Many investors fear getting caught in another 2008-09 meltdown, especially managers at major institutions that run billions of dollars and have little margin for error. The resulting knee-jerk selloff feeds upon itself, as investors equate falling prices with real risks to dividends.

Ironically, the aftermath of the 2008-09 debacle proved stocks will recover from disaster, as long as underlying businesses hold together during the crisis. The same scenario unfolded during the lesser selloffs of mid-2010 and mid-2011.

As the three graphs show, solid dividend-paying stocks have become more sensitive to the global economy and only truly recovered when stability returned. Australian and Canadian stocks, for example, have closely tracked oil prices the past five years, increasing their sensitivity to perceptions of future global growth. Even traditional dividend-paying stocks such as master limited partnerships (MLPs) and utilities now follow the economy-sensitive S&P 500, rather than traditional benchmark interest rates.

Bear markets affect certain stocks in different ways. First to decline are those most leveraged to economic growth. Last to fall are those deemed the safest and strongest.

The 2012 selloff has claimed more than a few victims, mainly among companies most leveraged to economic growth. Nothing that's happened so far this year comes close to the damage of 2010 and 2011, much less 2008.

When growth is sluggish and global credit markets uncertain, even the strongest company can stumble. A balanced portfolio of dividend-paying stocks should include as many different sectors as possible, from energy producers, telecoms, utilities and MLPs to real estate investment trusts, health care and financials. This diversification should extend to currencies as well, with particular focus on the natural resource-following Canadian and Australian dollars.

At any point, some of these sectors will outperform while others underperform. But the result will be a steady overall portfolio value, as individual holdings build wealth by raising dividends.

One solid play to ride out the weakness in the economy is, Linn Energy LLC (NSDQ: LINE), has raised its distribution twice in the past 12 months. Nevertheless, the upstream limited liability company's units still yield north of 8 percent, even though an extensive hedge book covers all of the firm's expected natural gas production through 2017 and all of its oil output through 2015.

Management expects the firm to grow its production by 65 percent in 2012 and to generate enough cash flow to cover its distribution more than 1.2 times in the back half of the year. The Linn Energy's profits cover payouts comfortably, balance sheet is solid and long-term strategy for growth is intact. Check out my free MLP Investments report to find out more about Linn Energy and several other top MLP picks.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.