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Protect Yourself From The Next Selloff With These 5 Income Stocks

The rebound in U.S. stocks is being mirrored abroad, as global indices bounce back from sharp losses most of them endured in the early weeks of the year. Energy prices also are enjoying a resurgence. So the bargain stocks we picked up while they were down are already generating solid returns.

But as the market continues to rally, it will be more important to continue to be selective when buying stocks. Valuations for shares of quality companies will rise beyond reasonable levels, and higher-valuation stocks are vulnerable to selloffs if sentiment again turns south.

One way to protect your portfolio while generating income is to look to stocks with above-average dividend yields. Income stocks are insulated somewhat from selloffs because as their share prices fall, their yields rise -- creating a higher share-price floor as income investors move in. And with fears of a global economic slowdown still prevalent, few observers think the nightmare scenario for high-yielding stocks -- a sharp rise in short-term interest rates -- will come to pass in 2016.

When looking at stocks with above-average yields, remember that the yield alone isn't the only criterion. We also need to ask how safe the yield is, by examining the company's balance sheet -- relatively low debt is a plus -- and cash flows, as well as the company's history of dividend payments. Even better, look at the company's history of dividend increases. Dividend growth is the secret weapon in an income investor's arsenal, because it can lead to truly impressive effective yields and total returns even when a stock's price doesn't move up impressively.

Here's how: imagine you buy shares of Company XYZ for $100 a share, and the company pays a quarterly dividend of $1.25, or $5 a year, for a 5% yield. If the company increases its dividend 10% a year, after five years it will pay $8.05 a year. Even if the share price remains at $100, you're now generating an 8% yield on your original investment. After another five years, you're making 13% a year! That's the power of dividend growth.

[More from StreetAuthority.com: Two Mid-Cap Growth Stocks To Buy Now]

In recent months, I've recommended several stocks with above-average yields and impressive histories of solid dividend growth, including Emerson Electric (NYSE: EMR), Southern Company (NYSE: SO) and Verizon Communications (NYSE: VZ), all three of which I still like today. Here are two more dividend growers that look ripe for the picking:

AT&T (NYSE: T) is one of the world's largest telecommunications companies, serving as the wireline broadband and telephone provider in 21 states and boasting 110 million U.S. wireless customers. The company was formed by the mergers of SBC, Pacific Telesis, Ameritrade, BellSouth and AT&T between 1997 and 2006. In 2015, AT&T bought DirectTV, making the company the largest pay-TV provider in the world. The company has a strong presence in Mexico and is looking to international markets to boost growth in the coming years.

The company has increased its dividend for 31 straight years. Thanks to the constant flow of subscriber bills coming in each month, AT&T generates strong cash flows, and as it absorbs and integrates DirectTV, its debt -- already manageable -- will fall to levels that allow dividend growth to pick up steam after increasing regularly, though slowly, over the past three years -- in part because the stock's yield has been quite high already.

AT&T currently yields 5.0% -- more than twice the yield of the S&P at 2.2% -- and trades at a reasonable 13.5 times analysts' consensus estimate for 2016 earnings per share. Given the high yield, moderate valuation and dominant market share, AT&T is a solid choice for income investors looking to buy and hold, and enjoy rising dividends, for years to come.

[More from StreetAuthority.com: This Mid-Cap Stock Is A Strong Growth Play]

Texas Instruments (Nasdaq: TXN) is the world's third-largest maker of semiconductors, or microchips. The company supplies chips for a wide range of products; the bulk of its revenue comes from analog and embedded chips -- highly specialized components for specific tasks -- for the industrial, automotive and communications sectors. Its highest-profile client is Apple, as TI makes microchips for iPhones and other Apple devices. But the impact of Apple on TI is often overemphasized, as it accounts for only about 10% of revenue. The vast majority of TI's business is diversified by sector, business line and geography.

Texas Instrument's management has made several smart moves in recent years to boost earnings growth by exiting more-competitive businesses and focusing on higher-margin products, such as 300-millimeter wafers vs. 200-millimeter wafers. As a result, the company has continued to generate strong cash flows even as it has endured up and down sales related to Apple and other cyclical end products.

Best of all, management is committed to strong dividend growth, having increased the payout at a double-digit annual rate for many years: from 30 cents for the full year in 2007 to $1.40 in 2015. At recent levels, the stock yields only 2.7%, but the effective yield for a buyer today should rise considerably in the coming years.

[More from StreetAuthority.com: This Industry Is Bouncing Back -- Is It A Sign Of Things To Come?]

Risks to Consider: AT&T is vulnerable to unfavorable regulatory rulings from the Federal Communications Commission, and it likely would be hurt from faster-than-expected increases in interest rates. Texas Instruments could be harmed by a downturn in semiconductor demand and bad news about sales of iPhones.

Action to Take: Buy AT&T under $40 and Texas Instruments under $57.

Editor's Note: We're locking in a paycheck of $15,100 for every $100,000 we invest... and our dividends keep growing... sometimes overtaking our original stock price. Invest like this and it just might change the way you think about investing forever.

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