It's bound to happen to you sooner or later. There you are, going along happily through life, and a setback hits.

It might be something as simple as a flat tire, or something as massive as a coronary. Whatever it is, it takes a hold of you, shakes you by the shoulders, and says, in effect, "Wake up and look at me." And if you're not careful, a simple little setback can mean a major problem later on.

Just look at the market we are in. No matter how you slice it, stocks are down. The S&P 500 Index is just under 5% down for the calendar year. In addition to the year-to-date drop, the index is over 10% below its 52-week high, which it set last October. On the plus side, the index is 11% above its 52-week low set in March of this year.

You could call it a setback -- a nearly 20% reduction in value in less than six months. If not a setback, then at least a slap in the face.

Interest rates have been falling, too. For some, this is a good thing, but for most of us, it means the cash we have is getting next to nothing. The interest rate on your idle cash in your brokerage account is headed closer to 2% and could even go lower.

Low interest rates and a market that looks like it may be headed sideways means companies with solid product lines and international sales could be the place to be. Being able to capitalize on sales in booming regions, these companies stand to do well as long as the economy is good somewhere. Many of these companies also pay a nice dividend with a yield north of 2%.

To be sure, in the short term, things could get worse for the stock market. A real turnaround might not take place until there are signs of a bottom in the housing market -- something that might not be seen until at least the summer.

But long-term investors should begin putting together lists of quality companies now selling at attractive prices, with an eye toward doing some buying, especially if the stocks get still cheaper.

It's hard to step up to the plate when stock prices are falling, but if you have a watch list of companies and a viewpoint on what their shares are worth, you can make a decision to buy with a clear head. Add in the ability to get a little hedge when you enter a position, and you should be good to go.

Let's look at a hedged trade on a fictitious company. Say the stock is trading at 57.12 and has a dividend yield of 2.4%. On this particular stock, you can do a covered call by buying the stock for 57.12 while simultaneously selling an October call at 65 for a net debit of 56.32 (57.12 – 0.80). If the stock is not over 65 at the time of expiration, then you keep the stock, the dividends and the call premium.

In this example, I picked the 65 call because I want to hold onto the stock but think a 13% gain is enough to cash in on. The way the market is going, in October I will likely still hold the stock and can sell another call another six months out. If I can get the same premium or better, then I will have effectively doubled the cash I receive for holding the stock. That is, about 1.28 in dividends and 1.60 in call premium (80 cents for the October call and 80 cents for an April call in October). 

Just because a stock pays a dividend does not mean it is a good buy. There are a few things you will need to look at before you enter a trade.

The first thing is to make sure the dividend is not shrinking. In these troubling times, some companies are finding themselves with cash flow issues. If they do not have the free cash flow to at least keep the dividend steady, you will probably want to stay clear. Keep them on your short list but don’t put money into them until their cash issues are cleared up.

Once you are satisfied dividends are growing, take a good look at the company's earnings. Since earnings power dividends, earnings growth is necessary for dividend growth. Make sure the long term earnings growth forecasts are sufficient to support continued dividend payment.

So, the company has not been cutting its dividend; it has sufficient free cash to continue to pay and it has earnings forecasts that indicate it will be able to sustain both. Now you need to look at the chart. Is the stock up, down or sideways?

If the stock has had a big run up in recent trading, you may be late to the game but you can still play. Since timing the market has never been a sure thing, chances are you will not have missed all of the upside.

If the stock has been moving sideways, this could be the right time to get in. In the event the stock has made a strong move down in the last few months, you may want to watch before you get in.

Looking around the market, there are a couple of companies you may want to look into.

Anheuser-Busch Companies (NYSE: BUD, Bullboard) is the holding company parent of Anheuser-Busch, Incorporated and to a number of subsidiaries. The company's operations are comprised of domestic beer, international beer, entertainment, packaging and other various segments and services. The stock receives a Standard and Poor's 4-star buy rating and a score of 89 B+ from Investors Business Daily.

If you are looking for a hedged trade on BUD, you may want to consider a September covered call with a sold call at 55. That's potentially an 11.6% assigned return (31.8% annualized for comparison purposes only) and, if the stock does not reach 55, you may be able to boost the return by selling another out-of-the-money call. While you are holding the stock, you will enjoy receiving dividends at a 2.5% annual yield.

Another company to look at would be Entergy Corporation (NYSE: ETR, Bullboard). The company is a major integrated energy company engaged in power production, distribution operations, and related diversified services. They are also a leading provider of wholesale energy marketing and trading services, as well as an operator of natural gas pipeline and storage facilities. The stock receives a Standard and Poor's 5-star strong buy rating and a score of 89 B+ from Investors Business Daily and has a 2.6% annual dividend yield.

For ETR, you may want to consider a September covered call with a sold call at 125. That's potentially a 12.7% assigned return (34.9% annualized for comparison purposes only) with the option of selling another call in September, should the stock not be assigned at expiration.

With this strategy, you are able to reduce your cost for long-term holdings in dividend-paying stocks. The call premium also acts like a secondary dividend and, with the right strike prices, can produce income for several cycles before the stock is called away.

Remember to thoroughly investigate any company before you put real money into a trade and make sure you understand the risk/reward matrix of the trade as well. Don't just sit around and ride along with the market. Make the market work for you and have some fun doing it.

This week Investors Observer covers:

Dividend Paying Stocks – Why dividends are more important for investors in current markets.

Articles:

* Finally! A Dividend from the IRS + Lee’s take on MSFT, T, XOM, YUM, BUD, and BBY  
* What’s So Important About Dividends?  
* Diminishing Dividends: What Does it Mean?

Click Here to read any of these articles.

Vic Wisemann
Lead Analyst

Vic Wisemann is an equity option strategy analyst with Investors Observer. Mr. Wiseman manages several portfolios for the company and comments weekly on his insights, strategies, and tactics for playing the market to win.

DISCLOSURE: Mr. Wisemann owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he discusses in his articles.