Worried that the market could sell-off at any moment, and bring back memories of the global financial crisis? You’re not alone.
Markets have been going up pretty consistently over the past two years, the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has climbed 37% since the beginning of 2012 – and that excludes dividends. Investors appear skittish with the market down 0.3% today, following on from falls offshore on Friday.
And the Australian Financial Review (AFR) reports that earnings per share growth over the past four years have averaged minus 2%. Fund managers say Australian companies are struggling to generate organic earnings growth and have had to resort to cost cutting and mergers and acquisitions to deliver growth expected by shareholders.
Earnings reporting season, which is just kicking off, will be crucial. Some analysts fear the ASX is vulnerable to a selloff, and a number of broker analysts have savagely downgraded their earnings forecasts for this year.
So here are two steps you can take to make sure your portfolio is ready for any surprises.
Get your risk right
With the market up 37% since early 2012, your portfolio may now have much more exposure to some stocks than others – like the big four banks for example. A simple way to reduce some risk is to take some profits, and make sure you are well diversified.
Watch your dividend shares
Dividend companies can be a great way to protect your portfolio through the downturns. But instead of just taking the dividends at face value, make sure that your companies are capable of still paying out those regular dividends.
There are more than 20 companies on the ASX with dividend yields above 10%, according to CapitalIQ. These include iron ore miners BC Iron Limited (ASX: BCI) and Grange Resources Limited (ASX: GRR) and mining services companies Lycopodium Ltd (ASX: LYL) and Calibre Group Limited (ASX: CGH). Given their respective threats (lower iron ore prices and falling resources investment), those yields could come under pressure.
On the other hand, Telstra Corporation Ltd (ASX: TLS) could surprise investors and raise its legendary dividend from the 28 cents it paid last year.
Motley Fool writer/analyst Mike King owns shares in Telstra Corporation. You can follow Mike on Twitter @TMFKinga
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