Investors need to ask how their portfolios will fare during times of crisis. When the S&P 500 takes a dive, will their investments dive along with it or hold up and even rally?

My approach in my Profitable Investing is to present an allocation to both stocks and fixed income. This combination provides growth and income, and helps portfolios absorb the shock that comes from the stock market’s gyrations.

This comes with lots of dividend income from my recommended stocks as well as the heavy income from coupons and interest paid by bonds, preferred stocks and related funds.

But it’s important to gain further perspective on what investments work better during selloffs. It only takes a few bits of financial history to see what worked when the S&P 500 wasn’t your friend.

Crisis Investing in the Fourth Quarter of 2018

The fourth quarter of 2018 was very bad for the general stock market. The S&P 500 lost 19.3% in price through Dec. 24 of the quarter. What set the selling off was the concern that sales and earnings growth of the underlying companies were less likely to rise. And in turn, everyone started selling.

This was exacerbated by the erroneous actions by the Federal Reserve and its Open Market Committee (FMOC) to tighten money conditions. But inflation — as measured by the core Personal Consumption Expenditure (PCE) index — was not sustainably above the FOMC’s target of 2%.

The benchmark Fed Funds rate went from 1.4% to 2.4%. And the reversal of some quantitative easing (QE) from the financial crisis added to credit market concerns. It also made things more expensive for S&P 500 member companies.

S&P 500 Fourth Quarter 2018

But some alternative investments fared much better. U.S. utilities — as tracked by S&P 500 — returned a positive return for the full quarter by 1.4%. And real estate investment trusts (REITs) returned a minor loss of 3.8%. The U.S. bond market — as tracked by the Bloomberg Barclays US Aggregate Index –returned 1.6%.

S&P 500, S&P Utilities, S&P Real Estate and Bloomberg Barclays US Aggregate Index Total Return 

And another asset sector stood out. Gold — as tracked by the London morning fixing price — gained 8.3%. That’s interesting as U.S. short-term interest rates were on the rise and the U.S. dollar was gaining. The dollar did begin to retreat in December.

The fourth quarter was more of a normal correction or selloff. It was based on expectations for fundamentals, including sales and earnings. The selling that occurred in the first quarter of this year was in a totally different market.

First Quarter 2020

The first quarter of 2020 was brutal. The S&P 500 went from a high of 3,386.15 on Feb. 19 to a low of 2,237.40 on March 23. That’s a loss in price of 33.9%.

S&P 500 First Quarter 2020

The novel coronavirus was just entering the U.S. with companies that had exposure to China and Europe seeing the initial impacts on their businesses. But the ensuing lockdowns did something that has never happened in the U.S. economy — they brought a nearly full shutdown of business.

The result was that everyone only wanted to own U.S. dollars in cash. The U.S. dollar soared from March 9 through to March 23 from 1,190.98 to 1,297.08 amounting to a gain of 8.9%.

Bloomberg U.S. Dollar Index 

The Federal Reserve jumped in to this mess, working even in the fourth quarter of 2019 to ease credit troubles in the repurchase agreement market.

And the Fed expanded into lending in the commercial paper market where corporations borrow and invest for overnight and short-term periods. But with necessary credit guarantees from the U.S. Department of  Treasury, the Fed began to buy all sorts of bonds and credit securities.

The S&P 500 has been reflecting the forward-looking optimism that lockdowns will end and that there will be some sort of recovery.

S&P 500, S&P Utilities, S&P Real Estate, Bloomberg Barclays US Aggregate and London Gold Fixing Total Year-to-Date Return

And the S&P 500 has regained some of the heavy losses. As just noted, during the heavy selling and the drive for cash, investors sold everything.

But on a year-to-date total return, utilities, REITs, U.S. bonds and gold have all outperformed the S&P 500 with lower losses, or in the case of bonds and gold, gains in return.

This shows the power of dividends as well as the current fundamental attraction of gold given the huge drop in U.S. short-term interest rates and the pullback and drop in the U.S. dollar.

Crisis Investing with Utilities

U.S. utilities provide some of the most secure and predictable revenue. Most traditional utilities have monopolies in essential services, which means they come with oversight from public utilities commissions (PUCs).

The PUCs not only set rates, but also provide assurance in operating margins, capital spending allowances and a return on capital investments. This assures utilities can operate profitably while providing essential services such as electric power.

And it means that utilities will be able to invest in the equipment they need to sustain and expand their businesses.

The regulated business then has secured expectations of revenues and profits, which is ideal for investors during both the good and very challenging times. And many utilities also have unregulated businesses that operate outside of PUCs.

The unregulated side of utilities provides additional revenue and growth, which is particularly helpful during economic expansion.

NextEra Energy (NEE) and Eversource Energy (ES)

There are two utilities with positive performances year to date that operate in both the regulated and unregulated markets.

NextEra Energy and Eversource Energy Total Return

The first of my crisis investing picks is NextEra Energy (NYSE:NEE). It has been a favorite in my Profitable Investing since 2008 and has returned 534.3% since then for an average annual equivalent return of 17.2%.

The company provides regulated power to markets in Florida, which remains a dependable region. But its major strength comes from its massive unregulated businesses throughout the U.S. It specializes in renewable energy from wind and solar operations, making it one of the globe’s biggest clean energy companies.

NEE stock yields 2.4% and has returned 1.95% year-to-date.

My second pick is Eversource Energy (NYSE:ES) which has both regulated and unregulated businesses in local markets throughout New England. It provides power, natural gas and water to residential and business customers. It also has transmission facilities throughout the region that allows other generator companies to access for fee income.

And like for NextEra, Eversource has been ramping up its clean energy production capabilities including through newer wind turbine facilities.

Eversource has fared a bit better than NextEra with a return of 4.6%. And since it was added to my model portfolios in October 2018, it has returned 43.9% which is more than 3.1 times the return for the S&P Utilities Index and 5.8 times the return of the general S&P 500.

REITs

REITs tend to be more reliable investments. They offer tangible assets of land and buildings, which generate ample rent and lease income. And under tax code, they avoid corporate income taxes by paying out the majority of profits to shareholders.

Now, in the current lockdown mess, not all REITs are the same. Retail REITs are not in good shape, nor are hospitality REITs — both for good reason. But there are many, many other sectors and individual REITs which are doing very well this year.

Two such REITs are Digital Realty Trust (NYSE:DLR) and Easterly Government Properties (NYSE:DEA). Year to date, Digital Realty has returned 25.7%, while Easterly Government Properties has returned 15.4%.

Digital Realty and Easterly Government Properties Total Return

Digital Realty is benefitting from current remote work trends. The company has data centers all around the nation. And those centers are what power and sustain cloud computing and data storage along with processing of all of those Zoom (NASDAQ:ZM) video chats.

The stock has not only done well in 2020 — but since being added to my model portfolios in February 2018. It has returned 58.3%, more than 2.9 times the REIT market and 4.99 times the S&P 500. And it also yields 3%.

Easterly Government Properties has the U.S. government as its primary tenant. This brings a certainty for revenue during good and very bad times.

DEA stock yields 3.8%, and since I added it to my model portfolios in April 2018, it has returned 48.7%. That’s 3.1 times better than the REIT market and 6.3 times better than the S&P 500.

Is Now the Right Time to Buy Bonds?

Earlier I discussed the expanding bond buying by the Federal Reserve. Through the special vehicles with credit guarantees from the Treasury, the Fed is making massive buys of U.S. corporate and municipal bonds. It is doing this to both stabilize the bond and credit markets now, as well as working to drive down yields and credit costs for corporations, municipalities and other debt issuers.

From the end of 2008 through the end of 2019, corporate and municipal bonds generated returns of 103.6% and 72.7% respectively.

Municipal (White) and Corporate (Red) Bond Total Return

So now, like in the last decade, corporate and municipal bonds are great buys for income and gains over time. You’re investing right along with the Fed.

Corporate Buys

Two bond funds in my model portfolios are the BlackRock Credit Allocation Income Trust (NYSE:BTZ) and the Vanguard Intermediate-Term Corporate Bond ETF (NASDAQ:VCIT). Both have impressive collections of U.S. corporate bonds. BlackRock actively manages the bonds, while Vanguard does it synthetically following the BlackRock & Barclays Index.

Over the trailing four weeks, both have impressive performance. Vanguard is at 6.7% and BlackRock at 21.6%.

Vanguard yields 3.4% and is a buy in a tax-free account. BlackRock as a closed-end fund is at a discount to net asset value (NAV) by 5.3% making for an even bigger bargain. Yielding 7.6% it is a buy in a tax-free account.

Municipal Buys

In my model portfolios, I have one taxable municipal bond fund, the BlackRock Taxable Municipal Bond Trust (NYSE:BBN). It is at a discount to NAV of 0.9% yielding 5.8% and is a buy in a tax-free account.

Then there are three tax-free municipal bond funds all at discounts to NAV. These include the BlackRock Municipal Income Trust II (NYSE:BLE), Nuveen AMT-Free Municipal Credit Income Fund (NYSE:NVG) and Nuveen Municipal Credit Income Fund (NYSE:NZF). They yield a taxable equivalent yield of 7.8%, 8.2% and 8.1% respectively. All are buys in taxable accounts.

Gold

There are many reasons that gold is gaining — like the plunge in U.S. short-term interest rates. With the Fed dropping its target rate for Fed Funds to zero, yields have plunged.

This make gold all the cheaper to own — and desirable as a parking place over cash.

My recommended way to own gold is to do so in a gold investment that pays a dividend. Gold in and of itself pays nothing. And in addition, it costs to store gold — even for gold ETFs like the SPDR Gold Shares ETF (NYSEARCA:GLD) that charges 0.4% annually to service its synthetic gold holdings.

Franco-Nevada (NYSE:FNV), which I first recommended to my Profitable Investing subscribers in June 2019, is a company that doesn’t mine gold, nor does the company own or store it. Instead, it has acquired and continues to acquire interests including royalties in gold and some other precious resource production. So, as gold is brought to the market, it gets its cut as the gold is sold. And it does this week after week, month after month — year in and year out.

And it cuts its shareholders into its revenues with dividend checks. The checks are running at 25 cents per share and should rise next month to 26 cents which equates to a yield of 0.8%. That’s not much — but it beats getting charged to own gold or a gold ETF.

The shares including the dividends continue to deliver better returns. Year-to-date alone, Franco-Nevada has returned 27.5% compared to the GLD ETF at only 13%.

FNV (White) & GLD (Red) Total Return

And over the trailing year FNV has outperformed GLD with a return of 89.1% to GLD’s 34.2%.

Gold is worth owning right now. Buy Franco-Nevada and get paid a dividend to own it along the way.

Neil George was once an all-star bond trader, but now he works morning and night to steer readers away from traps — and into safe, top-performing income investments. Neil’s new income program is a cash-generating machine … one that can help you collect $208 every day the market’s open. Neil does not have any holdings in the securities mentioned above.