An important part of building a diversified portfolio is finding stocks to buy for defense. Economic growth is cyclical, after all, and some sectors get hurt a lot more than others when things get bad.
True, we’re probably not in a recession these days. Heck, General Motors Company (GM) just reported record sales and profits. That doesn’t happen when the economy is contracting.
But the economy doesn’t have to fall apart for stocks to sell off. The fear of recession is more than enough. That’s where defensive stocks come in.
Ideally, these safety plays include big, established dividend payers with strong balance sheets that will hold up better when the market or economy is in a funk.
In addition to looking at specific sectors like utilities, telecommunications and consumer staples, it’s a good idea to look for low-beta stocks. Often used as a proxy for volatility, beta really comes in handy for measuring how a stock has traded compared with the broader market.
When a stock has a beta of 1, it trades in line with the S&P 500. A stock with a beta of 0.5 is sometimes said to be half as volatile as the broader market. More usefully, it means the stock tends to lag in an up market (a not so good thing) and hold up better in a down market (a very good thing.)
That’s why low-beta stocks are must-haves when the health of the economy and market is in question.
With that, here are three battleship stocks with some of the lowest betas on the market:
Stocks to Buy for a Recession: Consolidated Edison, Inc. (ED)
Utilities aren’t really counter-cyclical, because a slower economy consumes less energy. But utilities do have very low correlations to the broader market, and that can offer a cushion in a selloff.
To that end, Consolidated Edison, Inc. (ED) has one of the lowest betas of any stock on the market. Indeed, ED has a five-year beta of basically 0, which means it isn’t correlated with the S&P 500.
And wouldn’t you know it? ED is up more than 14% so far this year, while the broader market is down about 8%.
Add in the dividend yield of 3.7% and ConEd isn’t a bad place to hide out.
Stocks to Buy for a Recession: Verizon Communications Inc. (VZ)
There’s a reason why massive telecommunications stocks like Verizon Communications Inc. (VZ) are called widow and orphan stocks. They’re not volatile, not particularly sensitive to the economic cycle and pay a reliable dividend.
VZ, a component of the Dow Jones Industrial Average, ticks all the boxes and more. True, its five-year beta of 0.2 can’t match ConEd’s, but with low-beta stocks at these levels we’re kind of talking about a distinction without a difference.
In addition to VZ tending to rise in a down market — it has gained more than 8% for the year-to-date — you can count on its payout.
The dividend on VZ stock currently yields 4.4%. That’s far from the highest yield in the sector, but it is one of the most reliable. Verizon has paid uninterrupted dividends since 1984.
Stocks to Buy for a Recession: Church & Dwight Co., Inc. (CHD)
The consumer staples sector gains in popularity when investors get skittish. Recession or no, sales of toilet paper, diapers and other such goods aren’t going anywhere.
That brings us to Church & Dwight Co., Inc. (CHD). Arm & Hammer, Trojan and Aim are just a few of CHD’s brands that are theoretically recession proof. (Shoppers trading down for generic versions does remain a risk though.)
CHD has a five-year beta of 0.33, and you can see it in action so far this year, as CHD stock is up more than 4% in a down market.
True, shares have been range-bound for more than a year, but that’s not such a bad thing when everything else is selling off. At 1.6%, the yield’s not much, but neither is it nothing.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.