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2 Dividend Stocks to Provide Cover Against Market Volatility

HMN and KKR are good choices for investors who think conservatively

By Tim Melvin, InvestorPlace Contributor

http://invstplc.com/1yktjkX

When commentators talk about volatility picking up in the market, what they mean is that prices are moving lower. No one ever complains about upside volatility except a handful of short sellers.

horace-mann-hmn-stock-logo-185As we approach the end of the first half of January volatility is indeed picking up a bit as prices are now down more than 5% from the highs. Before we get too excited, let’s keep in mind that in spite of the triple-digit down days we have seen the past week or two, so far this barely qualifies as a pullback in the market right now.

It may get worse. That’s unknowable in advance, but it makes sense to be prepared if it does continue to decline.

Defensive, conservative investors in particular should be ready with a list of stocks to buy if the market continues to be weak. For defensive investors, I like to use the Graham number calculation that takes into account both earnings and asset values to measure the worth of a company’s shares.

The formula calculates a stock’s value based on its earnings per share, its profit-to-earnings ratio, its long-term earnings growth estimate and its yield on corporate bonds.

I like to wait until I can buy the stock at about 75% of the Graham valuation. In conservative portfolios I want to own large companies with long track records, reasonable balance sheets and a solid history of paying and raising dividends.

Horace Mann Educators Corporation (HMN) is a great example of the type of rock-solid conservative stocks defensive investors should consider if the market keeps falling in the weeks ahead. The company sells property and casualty insurance, life insurance and retirement plans to teachers, administrators and other employees of public school system in the United States.

The stock pays a 3% dividend and Horace Mann has grown the payout by more than 30% a year over the past five years. The stock is trading at about 80% of my Graham number valuation right now and if it fell below $29 a share it would be a must buy conservative stock for growth and income investors.

Private equity might not seem like a great investment for conservative investors but the large PE firms like KKR & Co. L.P. (KKR) fit the bill nicely. The firm has been around since the 1970s and has engineered some of the biggest deals in private equity history.

The firm has been public since 2010 and has already developed a solid dividend history. At the current price the stock is yielding more than 7%.

KKR has several exit deals on the schedule for 2015 that will provide fee and incentive income to the firm. To trade at my preferred entry level valuation the stock needs to pull back below $20 a share. That’s very possible should the current market weakness continue for much longer.

The time to build a list of solid dividend-paying stocks to buy in a sustained downturn is before it begins in earnest. These two stocks will help you start putting together your list of defensive stocks for long-term investors.

As of this writing, Tim Melvin was long KKR.

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