There is likely going to be volatility in the share market over the coming months and years as rates slowly return to more normal levels.
In my opinion, the stocks that are best suited to the volatility and interest rate rises are those that have little to no debt, large cash positions and diverse earnings.
The stocks that seem best suited to this scenario are listed invested companies (LICs). They all have little debt, have cash on hand to jump on opportunities and diverse holdings.
Here are my favourite LICs to take advantage of a volatile market:
The first group of LICs at the top of my list are run by Geoff Wilson and his team. WAM Capital Limited (ASX: WAM) and WAM Research Limited (ASX: WAX) were two of the best performing LICs in FY15, their portfolios returned around 30% each.
They have also outperformed their benchmark, the S&P ASX All Ordinaries Index (ASX: ^XAO), over various long time periods such as one year, three years and five years.
They managed to do this by mostly focusing on fast-growing small cap stocks at good value, whilst keeping a good amount of cash for safety and opportunities. WAM Capital and WAM Research held 35.4% and 40.6% of their portfolios as cash at 30 November 2016.
WAM Capital has a grossed up dividend yield of 8.63% and WAM Research has a grossed up dividend yield of 7.81%.
Geoff Wilson runs another LIC called WAM Leaders Ltd (ASX: WLE), which focuses on companies in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO). It's fairly new so it hasn't built up the required profits yet to pay out a dividend, but is likely to from February 2017 onwards.
At 30 November 2016 around 20.1% of its portfolio was in cash, so more of its cash is at work, but 20.1% is still a good amount to hold.
The other two LICs that I like are focused on the biggest companies in Australia and have similar weightings to the index.
Australian Foundation Investment Co. Ltd. (ASX: AFI) (AFIC) and Australian United Investment Company Ltd (ASX: AUI) (AUI) both have illustrious histories having been around for many decades.
Whilst they haven't grown strongly over the last few years, they have provided shareholders with reliable dividends. AFIC and AUI have maintained or increased their dividends every year since 2002.
Although nothing is guaranteed, it is comforting that these two LICs provided safe dividends through the GFC and may continue to do so.
AFIC has a grossed up dividend yield of 5.96% and AUI has a grossed up dividend yield of 6.43%.
Foolish takeaway
Who knows what's going to happen in the market over the next few months and years? I don't, but it's fairly safe to say that the above LICs with their investment teams should be able to weather whatever happens next and grow for decades to come.
Any or all of these LICs would be great companions in your portfolio alongside individual stock picks like these three great dividend payers.
