NEW YORK (CNN/Money) -
After months of steady gains, the stock market has lost its balance. Fears about the economy, turmoil in the Middle East and potential terrorism sent the Dow plummeting more than 700 points since late February.
Thursday, however, the market came roaring back. On the day, the Dow closed up 170 points, while the Nasdaq gained more than 57 points, or 3 percent.
Market analysts say that stocks were oversold, and that they were poised to rebound on any good news. Strength in technology shares and easing oil prices apparently provided the catalyst for Thursday's gains.
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Even if the worst is over, many shareholders are understandably unnerved by the recent turmoil in stock prices. In fact, small corrections are normal in a market recovery. Nonetheless, investors are now actively trying to control the risk in their portfolios.
Diversification is still the right move
In general, the best remedy for volatility is diversification. Ideally, you should not only buy stocks in a variety of industries. You should also balance your equity holdings with a variety of other assets.
The most important category to add is income. But with interest rates so low today, how can you get a predictable stream of cash distributions?
In fact, stocks with yields above 2 percent will help greatly to lower the overall volatility of a growth portfolio. The fact that a part of their return is highly predictable generally makes their share prices more stable.
To identify such stocks, you should look for more than just a high current yield. Ideally the stock should be trading at a relatively low price compared with its annual cash flow, a sign that the company has money available to increase the dividend.
In addition, you should favor companies with rapid historical dividend growth, as well as those that might be able to boost their dividends in specific economic scenarios -- such as an unexpected rise in oil prices.
Here's a quick look at four stocks that trade at less than 12 times cash flow and pay yields of more than 2.5 percent.
Bank of America, one of the largest U.S. bank holding companies, should complete its $47 billion acquisition of FleetBoston Financial within the next week or so. The combined companies may be able to cut 7 percent of the workforce, producing total savings of more than $1 billion annually. The stock, which has a fat current yield of 4 percent, also has a double-digit dividend growth rate over the past five years.
ExxonMobil is the largest publicly traded oil company. The stock is also highly stable because of the diversity and size of Exxon's businesses. With a 2.4 percent yield and projected earnings growth of the next five years of 8.5 percent annually, Exxon should reward investors with a double-digit average annual return. And in case of a sustained period of high oil prices, Exxon is likely to outpace the market, providing a valuable counterweight to whatever losses growth stocks might incur.
Limited Brands recently raised its earnings guidance for the quarter because of strong growth in same-store sales. The retailer, best known for its Victoria's Secret and Bath & Body Works chains, has plenty of cash on hand and is using some of it to buy back stock. The shares currently yield 2.4 percent.
Sara Lee is a favorite of income investors, with its 3.4 percent yield. Besides baked goods, the company sells tea and coffee, frozen bagels and hot dogs, as well as stockings and underwear. Those business may not be exciting, but they do provide large, steady free cash flows. And they certainly are predictable. Sara Lee has paid dividends for 232 straight quarters, or 58 years.
Michael Sivy is an editor-at-large for MONEY magazine. Sign up for free e-mail delivery every Tuesday and Thursday of Sivy on Stocks.
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