With the S&P 500 at 2,000, setting new all-time highs, there’s no shortage of bears out there worried about a pullback.
Some alarmists are calling for massive corrections, while others are simply predicting a modest 10% to 15% pullback that will make take some of the froth off stocks and return valuations to “normal” levels.
Regardless of your definition of a crash, the bottom line is that losing a big chunk of change in a downturn can have serious impacts on your retirement planning. If you need the money to live off of now, obviously, that hit could affect your daily budget. And if you’re planning on growing your nest egg at a predictable pace, a big correction could force you to adjust your goals — including delaying retirement a year or two in order to make up for the shortfall.
Protecting your money is often just as important as making it grow. So to help you stay safe if a correction hits, here are five of my favorite crash-proof investments to consider right now:
Market Vectors Preferred Securities ex-Financials (PFXF)
Dividend Yield: 6%
YTD Returns: 9%
I recently highlighted the benefits of preferred stock funds, pointing to the stability in shares as well as the big income potential of these investments.
Of course, a big risk here is that the vast majority of preferred stock ETFs and mutual funds focus on the financial sector. And as we learned in 2008, this overreliance on bank stocks in your portfolio can be hazardous if there’s a crash.
But if you don’t like the financial focus of other preferred stock funds, there’s always the Market Vectors Preferred Securities ex-Financials (PFXF), which steers clear of banks altogether. The fund is heavily focused on REITs, telecoms and utilities instead, providing a much more stable base of preferred stocks — in sectors that most income investors are already comfortable with, and that tend to hang tough even in a downturn.
In addition to a juicy yield, the performance is good as of late. The fund is up 9% in 2014 to outperform the S&P. It also offers a modest 0.4% in net expenses too, making the diversification and access to preferred stock a pretty affordable option even for small-time investors.
Williams Partners (WPZ)
Dividend Yield: 6.9%
YTD Returns: 5%
Williams Partners L.P. (WPZ) is an MLP that focuses on energy infrastructure more than the fossil fuels themselves. Williams operates gas pipelines and midstream businesses around the U.S. and Canada, and dishes out a nice 6.9% yield at current pricing.
Williams shares have admittedly underperformed lately thanks to the “risk-on” market. But long-term performance is actually more sleepy then depressing; WPZ has a beta of just 0.3, meaning it “wiggles” much less than the market at large. That’s precisely the kind of stability you want in a crash-proof stock.
Now, anyone looking to buy WPZ stock should be warned that the dividend at this MLP isn’t fixed and can fluctuate from quarter to quarter. However, the dividend has actually marched higher each of the last four years, from 64 cents to almost 92 cents per share, so that kind of change is certainly a good thing for investors.
The big yield and head-of-the-industry market cap at nearly $23 billion means that Williams isn’t going away anytime soon. And as a “toll taker” MLP that focuses on energy transport and storage, Williams doesn’t have the risk of either exploration on the front end or refining and selling products on the back end.
This positioning gives WPZ stability in any market, making it a great high-yield investment for even the roughest markets.
Dividend Yield: 2.6%
YTD Returns: 27%
Teva Pharmaceuticals (TEVA) isn’t a household name like blue-chip drugmakers, and it isn’t a high-powered biotech darling researching impressive new cures, either.
Teva is actually quite boring, as the world’s largest manufacturer of generic medications. After a big company has run its course with a patented medication, TEVA steps in and makes the same drug, then sells it for less to patients who need it.
The margins are thinner, but you can make up for this with scale — and with more than $20 billion in sales annually in all corners of the globe, Teva certainly has scale.
While there’s no breakout potential in TEVA stock, don’t think there isn’t any growth. Teva has big emerging-market operations where prescription drug use is growing nicely as people seek out the latest medical options. That exposure is growing, too, as Teva makes a big push towards acquisitions — including a $6 billion bid for an India-based drug company earlier this year in order to maintain market share in the region.
In addition to this growth opportunity, unlike some other pharma stocks out there, patent expiration will never be an issue that weighs on its margins thanks to the generic focus of TEVA.
With a nice dividend yield, too, TEVA stock has a lot to offer investors who are looking for solid and reliable income plays for the long term.
And given the crash-proof nature of healthcare — consumers cut back on just about any other spending before passing on prescriptions and treatment — investors worried about a correction can have confidence TEVA will hang tough.
Dividend Yield: 3%
YTD Returns: 11%
Cisco (CSCO) stock admittedly hasn’t been very impressive over the last few years based on share price alone. The stock is up just 25% in the last five years vs. March 2009 lows vs. 117% for the S&P 500 index.
But when you’re looking for stocks with great stability going forward, Cisco has to be part of the discussion.
For long-term dividend investors, CSCO could hold serious potential as a value play — especially at current pricing. Cisco yields 3.0% in dividends, topping many consumer staples companies, and has an amazing history of dividend growth that implies more upside for payouts.
CSCO initiated a dividend in 2011 at 6 cents per share quarterly, and it has already tripled that to 19 cents. Furthermore, even after this steep increase, the dividend payout ratio is about 35% of projected FY2015 earnings. That’s easily sustainable, and even ripe for future increases in dividends.
The most recent Cisco earnings did rattle some folks with news of layoffs, and flat revenue. But investors have heard this story many times before, so the narrative isn’t new, and negativity is priced in.
After all, Cisco has a forward price-to-earnings ratio of just under 11 and a hefty $50 billion in the cash and short-term investments. That valuation and cash gives it protection against whatever the market throws its way.
Just because you’re looking for low-risk investments, you shouldn’t completely shun tech stocks. CSCO is one of the biggest technology companies in the world, and one that has a very stable foundation after its recent downsizings.
HCP Inc. (HCP)
Dividend Yield: 5%
YTD Returns: 19%
One of my favorite rock-solid investment themes is healthcare. Between the demographic tailwind of the aging Baby Boomer population and the rise of insurance coverage under Obamacare, there is a strong “customer base” for many health-related businesses.
If you want to play this durable trend with an income focus, a great option is HCP Inc. (HCP).
HCP is structured as a real estate investment trust, but focuses mainly on healthcare real estate, including senior housing and medical offices. HCP has the mandate to deliver at least 90% of its taxable income back to shareholders in the form of big dividends.
The medical-focused tenants in HCP office parks have reliable revenue and are stable businesses, and that means reliable revenue in turn for HCP. And HCP has big exposure to senior housing, offering a steady stream of income via the rent that seniors pay each month for these retirement communities or assisted-living facilities.
As Dan Burrows recently pointed out, HCP has a very low beta — around 0.55 right now — meaning it moves less than the market at large and is characterized by low volatility, even if the S&P 500 is making big swings.
This lack of volatility is a hallmark of crash-proof stocks and when paired with the healthcare focus means that this dividend-rich REIT is a stable long-term play that you can believe in.
Exelon Corp. (EXC)
Dividend Yield: 3.7%
YTD Returns: 22%
There are some utilities stocks that have been struggling after running up a few years ago, and facing very rich valuations in 2014. But Exelon Corp. (EXC) is not one of those stocks.
EXC stock is up 22% year-to-date and still boasts a modest forward P/E of about 13 despite this run. It’s one of the best stocks in the utilities sector so far in 2014.
Utilities are an old fallback in hard times, with reliable revenue from customers and virtual monopolies thanks to a highly regulated space.
Exelon is the perfect example of this, with a beta of 0.3.
In April, EXC announced it would acquire Maryland utility Pepco to increase its footprint and provide a larger revenue base. Acquisitions like this are really the only way that utility companies can grow, given the geographic restrictions involved with the space, so that news bodes well for the long-term performance of Exelon stock.
The roughly $6.8 billion acquisition of Pepco will add about 2 million customers to the rolls, making EXC cover about 10 million people with its electricity generation business. That’s a nice baseline that will provide reliable revenue for years to come.
Sure, utility stocks are naturally sleepy and there isn’t a lot of breakout potential for Exelon. However, if you’re in the market for a defensive investment that will protect your money in any market, you could do worse than EXC.
Fidelity Short Duration High Income Fund (FSAHX)
Dividend Yield: 3.8%
YTD Returns: 3%
Thanks to the low interest rate environment, many bond funds offer paltry returns. And furthermore, the possibility of an interest rate hike in the next year or two mean that many long-term bond funds could take a hit.
That’s because when yields rise, the value of bonds can fall — particularly for investments with a longer duration.
If this sounds like a lose-lose scenario, I don’t blame you for being skeptical of bond funds. But what if you could match the low interest rate-risk of a short-term bond fund but also capture a modest income stream?
That’s just what the Fidelity Short Duration High Income Fund (FSAHX) does. The fund focuses on “junk” debt and some investment-grade debt, and right now its holdings have an average maturity of just 3.5 years.
Top holdings right now include bonds from French telecom Numericable and privately held industrial Schaeffler.
Again, returns don’t burn down the house thanks to this low interest rate environment. But thanks to a strategic portfolio of higher-yield investments with short durations, investors can get an income stream that is significantly higher than Treasuries but without taking on the admittedly bigger risk of investing in equities.
If you’re looking for preservation of capital and a way to protect against a crash, bonds are a nice place to hide. And if you can hide in bonds without the interest rate risk or sacrificing yield, that’s a great place to be.
This Fidelity Short Duration high Income Fund offers just that balance. Even if shares won’t appreciate much thanks to the nature of bond investments, you have a very solid and low-risk investment in FSAHX that will protect you from any downturn.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.