This Monday our nation honored its fallen military heroes via Memorial Day celebrations across the land. These brave men and women paid the ultimate price while defending the value of freedom, and as such they deserve our unflinching devotion. Now, given the stock market’s recent downturn (the S&P 500 Index is down about 7% off its April high), another crucial value we must all move to defend is our investment portfolio.
Simply put, now is the time to think defensive, and that means focusing our attention on the best-of-breed defensive stocks.
But what, precisely, constitutes a defensive stock? Basically, these are shares of companies in industries whose performance and sales are not highly correlated with the general economic cycle.
In other words, these are stocks that should deliver steady returns during either boom or bust times. We’re talking here about sectors such as consumer staples, health care, telecom and preferred stocks. What these sectors have in common is that they aren’t likely to crater when the market or the economy turns south. Conversely, they usually don’t deliver superhuman returns the way tech stocks do during bull markets.
1) Procter & Gamble
If you’ve visited your bathroom today, you’ve probably used a product made by Procter & Gamble (NYSE:PG). That’s because the consumer goods giant makes such ubiquitous brands as Head & Shoulders, Gillette, Crest and Charmin—and that’s just its bathroom-related brands. The company also makes cleaning products for the kitchen, for your pets, and for you children. If the market and/or the economy shift into low gear, PG shares are likely to continue delivering solid upside. Another attractive aspect of PG shares is its yield. The company’s dividend yield of 3.6% makes it a good way to collect income while the riding out the downturn.
Drug maker Pfizer (NYSE:PFE) is another company whose brands are likely to continue being purchased no matter what’s happening in the economy. Although this Big Pharma stalwart always faces the prospect of losing revenue when proprietary drugs go off patent, it’s got plenty of drugs in the pipeline to keep the profits pouring in. The stock has done quite well over the past several months, gaining 4.5% vs. the S&P 500’s decline of 3.2% over the same period. This market-besting performance also comes with a dividend yield of 3.9%, making Pfizer a very attractive way to play defense.
3) Philip Morris
Tobacco giant Philip Morris (NYSE:PM)) manufactures and sells cigarettes and other tobacco products outside the U.S. In fact, the company was spun off from parent Altria Group (NYSE:MO) in 2008 in order to segregate international operations from U.S. operations. Pending product liability litigation in the U.S. forced this split, as Altria wanted to make sure it took whatever steps necessary to avoid paying out huge legal settlements. The decision has paid off for the company, and for investors, as PM shares are up nearly 75% since breaking from the parent company. PM’s share price performance in 2012 is nearly double that of the S&P 500, and the shares also reward investors with a smoking-hot 3.60% dividend yield.
Telecom giant Verizon Communications (NYSE:VZ) has seen its shares surge about 8.5% over the past three months, as investors now realize that smartphones and other mobile computing devices such as tablet computers are becoming devices consumers can’t do without. Wireless carriers like Verizon have been able to push through rate and fee hikes when customers upgrade, and thanks to new phone offerings such as the Apple (NASDAQ:AAPL) iPhone 4S, and Google (NYSE:GOOG) Android OS phones, telecom stocks have once again become defensive plays. VZ’s attractive calling card also includes a whopping 4.8% dividend yield, which means you’re getting a very clear connection when it comes to income.
5) iShares S&P U.S. Preferred Stock Index
If investors hunker down and start getting even more conservative with their capital, we could see a decided move into dividend-paying sectors. One of the best ways to participate in dividend-paying equities is via the iShares S&P U.S. Preferred Stock Index ETF (NYSE:PFF), an exchange-traded fund (ETF) that holds some of the highest-quality preferred stocks available today. Think of preferred stocks are a sort of cross between regular stocks and bonds, and the best part of preferred stocks is they pay a guaranteed dividend. That guarantee makes PFF a very attractive defensive play during times of market turmoil. PFF shares are up approximately 7% so far in 2012, but the real attraction here is the 6% dividend yield. That’s the kind of yield that really pays off, and that’s precisely what you need when it’s time to play defense.