While just a few short months ago, investors were cheering as the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) approached the 6,000 level, today the ASX is once again sinking lower and is less than 1% away from crashing below 5,500 again.
The sell-off on the ASX follows weak corporate earnings results from Wall Street, further weakness in oil and metal prices and continued volatility in Chinese markets which included an 8% fall yesterday.
While the long term outlook remains positive for investors, there is a possibility given the full valuations and low interest rate environment that in the near term markets could head substantially lower.
Given the positive long-term outlook for stocks, any near-term correction will more than likely represent an attractive buying opportunity. To maximise your opportunity to benefit during a correction having some available cash when price levels drop is a key advantage.
It's also important to allocate a portion of your portfolio to solid, dividend-paying blue-chip stocks for multiple reasons.
Firstly, a reliable inflow of dividend income can provide the cash flow necessary to make purchases during a market sell-off.
Secondly, the defensive nature of blue-chip stocks can make them less volatile, thereby preserving your wealth.
Thirdly, blue-chips are more liquid which allows shareholders to trim a position if they want or need to. This liquidity benefit is important as it can allow an investor to switch into more appealing stock opportunities as they arise during periods of volatility.
Three blue-chip stocks that you may want to consider holding for their combination of defensive qualities and growing dividends are Telstra Corporation Ltd (ASX: TLS), Wesfarmers Ltd (ASX: WES) and National Australia Bank Ltd (ASX: NAB). Based on FY 2016 forecasts provided by Morningstar, these three stocks are trading on fully franked yields of 5%, 5.1% and 5.9% respectively.
