After running up against some awful-looking fundamentals, the equities market got its first big test from rising bond yields. Notably, the benchmark 10-year yield on Feb. 26 was 1.46%, which is 15 basis points higher than the week-ago period, according to a CNBC report. This narrative has now disincentivized many high-flying growth names in favor of your typical safe stocks to buy.
Primarily, as yields rise, conservative investors have more reason to roll out of risk-on equities and shift toward more reliable investments. Even staying in cash, should the trend continue unabated, would be beneficial rather than exposing yourself to unnecessary risks.
Furthermore, we should see greater interest in so-called safe stocks to buy. Over the past several weeks, I noted that the real interest rate — the benchmark rate with inflation backed out — is actually negative. This is a strange circumstance where cash holders are effectively penalized for their conservative financial strategy. Therefore, astute investors piled into various assets like real estate to advantage the cheap money environment.
Well, the risk now is that should bond yields continue to rise, more investors will rotate out of momentum names. And why not? The market was already frothy before news broke about rising yields. But because of this latest development, there’s an added push to do what people were already thinking anyways. In this ecosystem, then, investors who want to stay in equities should consider some mitigation via these safe stocks to buy.
- Microsoft (NASDAQ:MSFT)
- Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B)
- Capital One Financial (NYSE:COF)
- Paychex (NASDAQ:PAYX)
- Twilio (NYSE:TWLO)
- Bandwidth (NASDAQ:BAND)
- Costco (NASDAQ:COST)
- Wheaton Precious Metals (NYSE:WPM)
Also, one important point to note is that tax day is coming up. The IRS may be many things but dumb isn’t one of them. Its accountants know that millions of Americans played the market and profited handsomely. Now, it’s time to pay up. And that could really incentivize these safe stocks to buy as the popular securities take a hit from the rotation.
Safe Stocks to Buy: Microsoft (MSFT)
While Microsoft is fundamentally an exciting technology investment, it’s days as a growth wager are long over. Now, it’s one of the safe stocks to buy — and quite boring at that (again, from a market perspective). But boring is good these days, especially since a risk exists that the cheap money environment could fade. If so, you’ll want to consider MSFT stock.
Part of the reason why bond yields are rising is due to growing confidence in an economic recovery. Yes, January’s jobs report was a disaster. However, analysts anticipate better results — possibly showing 218,000 payrolls — for February. If so, that would imply a more robust consumer economy as people return to work.
The beauty of the narrative behind MSFT stock is that its universally prevalent business offerings are relevant no matter which way society goes — either a return to the office or continued remote-work operations. It’s a great natural hedge in this list of safe stocks to buy, which is why I placed it on top.
Berkshire Hathaway (BRK.B)
Over the last five years, Berkshire Hathaway has delivered its shareholders a return of 74.3%. That’s a decent tally. Certainly, there are investments that have lost that over the same period. But chances are, BRK.B stock is not going to make you rich. Instead, it’s one of the safest of safe stocks to buy, designed to weather some unexpected storms.
Now, I don’t expect BRK.B stock to make up a permanently large portion of your portfolio. However, it may make sense to rotate some of the profits you may have made through the high-flying names into Berkshire. Whether bond yields go higher or not, I have no idea. But what I do know is that the conglomerate owns everything.
When you’re taking bets across the board, the upside of course will be limited. But so will the downside. Sentiment wise, the latter carries a higher premium right now.
Capital One Financial (COF)
Several years ago, many wondered why Capital One Financial sought the services of Samuel L. Jackson for its credit card advertisements.
Because he’s Samuel L. Jackson, that’s why. Is there any other reason you need?
While his appointment may not have made sense to the suits who button even their polo shirts to the very top, as it turns out, Mr. Jackson was an excellent choice. You see, if bond yields continue unabated, we may see some red ink in the equities sector that will elicit vocalizations that has made the actor a universal favorite. And that just might make COF stock perform well — or at least limit the downside.
Here’s the thing — higher interest rates are theoretically good for Capital One as it can earn more for lending out to people. If the economy truly does improve, the customers will pay it. Further, credit card delinquencies have almost hit rock bottom, which means consumers are prioritizing debt payments, which is good for the stability of COF stock.
If you like complex narratives with your safe stocks to buy, you may want to check out Paychex. A provider of administrative, human resources and payroll services for primarily small and midsized businesses, PAYX stock was a reliable entity during the pre-pandemic era.
With the crisis, though, Paychex’s storyline had some twists and turns. Yes, many companies initiated work-from-home operations — and those employees needed to be paid. At the same time, the novel coronavirus pandemic disproportionately affected smaller businesses, presenting a potential revenue challenge for PAYX stock.
However, if the labor market does improve, I believe that Paychex makes for a viable long-term investment. In addition, a higher interest rate environment means that the company can earn a higher yield on the float. So if you’re looking for safe stocks to buy to park your money while having some exposure to positive trends in the economy, PAYX is your go-to name.
Twilio is an interesting idea because it’s not what most analysts would consider among safe stocks to buy, especially during a period of economic and societal uncertainty. Plus, TWLO stock doesn’t pay a dividend — usually a hallmark of what you might consider a “safe” investment.
But as you know, safe is a relative term in the market. As negative real interest rates demonstrated, even staying in cash has risks. Getting that caveat out of the way, TWLO stock is tied to perhaps the most important development in finance in the last few decades: cryptocurrencies.
No, Twilio isn’t a crypto play. However, the company provides many technological and cloud-based services, including two-factor authentication or 2FA. Such mechanisms impose an additional identification protocol before users can access their highly important accounts.
Logically, with cryptocurrencies having took off like wildfire (though they’ve been moving all over the map recently), even the smallest accounts have likely seen substantial percentage increases. Thus, interest in virtual currencies could bolster Twilio’s brand as one of the contextually safe stocks to buy.
Another technology growth name, Bandwidth admittedly is not a classic example of what you might call safe stocks to buy. Like Twilio, it doesn’t pay a dividend, with stakeholders exclusively banking on the upside potential of BAND stock. So, why bother mentioning it?
The simple explanation is that Bandwidth’s tech-and-cloud-based solutions are supremely relevant. In particular, I’m keying in on the company’s communications API solutions. I’m going to butcher the explanation so I highly recommend you consult expert resources for more information. But in a nutshell, APIs disparate digital entities to speak with each other in order to deliver the end-user a requested action item or information.
It’s easier to consider companies and services who use communication APIs, such as Uber (NYSE:UBER) or DoorDash (NYSE:DASH). As you can imagine, contactless services will probably still be relevant until we truly return back to normal. While contrarian, you may want to consider BAND stock in your safe (or safe-ish) investment portfolio.
Originally, I was going to pick retailers like Walmart (NYSE:WMT) or Dollar General (NYSE:DG) as the safe stocks to buy in this environment. Personally, I think the risk of a prolonged recession is real, irrespective of what the rising bond yields imply. However, many retailers — whether of the discount or big-box variety — have been shedding value this year.
That being the case, I’m redirecting my attention regarding safe stocks to buy to Costco. To be fair, COST stock has not been performing well, down nearly 13% year-to-date. Nevertheless, the discount may present a viable long-term upside opportunity.
Mainly, I say this because of its strong consumer base. The average Costco shopper pulls in a six-figure salary, which you’d expect from all the Porsches and Mercedes SUVs parked in the lot. Basically, then, if the Costco shopper starts feeling the pain, we all may have bigger problems on our hands. Thus, consider COST stock cynically as the last man to face the firing squad.
Wheaton Precious Metals (WPM)
I know what you’re thinking — historically, precious metals do not represent good investments in a rising yield environment. And you’d be right about that in the current environment. Precious metals — as in all of them — have taken a huge hit in recent sessions. The explanation is logical and straightforward.
As you know, chunks of metal don’t pay dividends. Nor do they have earnings or actual businesses or employ people. Quite literally, they are the dumbest of investments. Naturally, it only makes sense for investors to rotate out of precious metals into anything else in this ecosystem.
However, I still like Wheaton Precious Metals as a discounted long-term investment. Day to day, anything can happen. But in the long run, having some exposure to safe-haven assets makes sense. And WPM stock is much more convenient than holding physical assets.
That said, the anything-can-happen landscape also applies to the downside. Therefore, only put a minimal amount of your funds toward WPM stock, keeping the powder keg dry for additional buy-the-dip opportunities.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.