Dividend-paying funds are good vehicles for investors who don’t want to trade often, but still want to capture market gains, says advisor Bob Phillips. He tells MoneyShow.com about two of his favorite funds.

Kate Stalter: Our Daily Guru guest today is Bob Phillips, managing partner of Spectrum Management Group.

Bob, as we’re speaking today, there’s a great deal of euphoria in the media about the Dow reaching the 13,000 level. But just to put that in some context: What should individual investors be doing right now, given what you’re seeing in the markets?

Bob Phillips: Well, that’s a great question, Kate. What I believe people have to really realize is that we believe that we’re in a cyclical bull market inside a longer-term bear market.

When you look at things, the major indexes are up about 20% or more from the lows they hit last October, and that’s usually the definition of a bull market. When you have those occurrences of a rally inside a longer-term bear market, they usually last for close to a year or more, is the median time frame. And we’re about four months into this rally, so we think we have more to go.

So, at this stage of the game, we do think the stock market is a place to be. If people aren’t positioned they should look to be getting positioned into the market, either through an index fund, or if they have some stocks they like, that way as well.

But I would caution them that I do think this is a relatively short-term trade. We are not by any means saying that this is a buy-and-hold sort of market. You need to have some risk controls in place and some definitive sell discipline to protect yourself later on.

The way that we would suggest people gauge that is by basically, even on an index fund, setting like a 10% stop-loss position. If the market reverses that much or more, it probably is a signal that maybe the good times are coming to an end, and it’s time to move back to protect mode.

Kate Stalter: And certainly in the past year or so, if not two years, there have been enough news-driven events that have sent the market plunging, with more to come out of Europe, many believe. Where do you see that headed?

Bob Phillips: Well, all those issues still exist, unfortunately. That’s why we think we’re in a bull rally here inside a longer-term bear market.

Europe has addressed the issue. In theory they found a solution for Greece, but I think we all know Greece is just the tip of the iceberg. The real issues revolve around Italy and Spain and Ireland, and some of the other countries, and the debt they have to continue to roll over, relative to Greece’s debt, is a multiple of probably ten or better.

So the big issues still exist. Now they bought some time, though, and that’s why we think that this rally that we’re in—which is actually kind of a global rally—most of the markets around the world are above their 200-day moving average.

The ECB, back in December, put a three-year program in place where banks could borrow from them to essentially allow the banks to reinvest back in government debt and kind of keep the debt rolling. So the pressure’s off for the short term, but the structural issue is not solved. So we do think that there’s definite headline risk there that the issue’s going to resurface at some point in time.

And quite honestly the same issue exists in the US. We’ve not dealt with our structural issue either, but what we do know is optimism’s getting higher. The employment numbers the last few months have been quite a lot better, and it’s a nice trend to see. Leading economic indicators that were released in January were positive for the fourth month in a row, another good trend.

So that kind of tells us we’ve got maybe a few months of good economic data yet to surface, which I think keeps a bit underneath the market, and probably keeps equity prices rising a bit from here.

Kate Stalter: Bob, you’ve talked a bit today about some of the big-picture strategic moves that investors should keep in mind. Anything on a more actionable level for the next few months that you see as good investment ideas, bad investment ideas? How would you see that?

Bob Phillips: Well, I’ll answer that two ways. If you’re interested in playing this move in the market, we think you want to look toward stocks that tend to do well in a positive cyclical environment. Stocks like Cummins (CMI), for example.

Cummins is the world leader, basically, in truck engines, and diesel engines in particular. They’ve got the best technology in the world—and not only for engines, but also for power-generation systems that are being used quite extensively in the emerging-market areas. And we think it’s a company that has very little debt, and they are positioned to do quite well in this environment we think yet this year.

If you’re looking longer term, one of the hard things, when you look at being in the environment that we’re in right now, is that I think the market has more upside to go in this current rally that we’re in, but we are concerned longer-term that those prices hold.

If you’re the kind of investor that you don’t want to have to worry about trading the market, I think really the best strategy is to look to a good dividend-paying stock fund. A fund that focuses on dividend plays. And you could do that through an exchange traded fund, like Dow Jones Select Dividend Index Fund (DVY) is a good example.

There’s a fund that Thornburg Investment Management manages called Thornburg Investment Income Builder (TIBAX) that we like. I like it a lot. It focuses on dividend-paying stocks around the world. And the advantage to dividend-paying stocks is that you get consistent cash flow.

And if you could purchase companies that have very low debt on their balance sheets, they are always in a position to react to the environment and survive the environments. Even though they may take a hit in price short-term, they could always adjust the business, protect profitability.

And if you find those that have paid a consistent dividend for a long period of time, we think that they’re almost automatically self-correcting through bad environments. While things are rough in terms of price changes, you've got consistent cash flow coming in. We think cash flow is the key element that lets all investors live to play another day.