With the Dow Jones closing at a fresh record recently, targeting defensive stocks might seem like overkill. You want to be careful in the capital market, no doubt about it. But you also don’t want to fall prey to opportunity costs – the what-could-have-been questions.
Nevertheless, it’s important to stay in the race if you want to stand any chance of winning it. While many signs of positive roads ahead exist, they’re also accompanied by clear warnings. For example, last year, the regional banking crisis initially shook the global markets. This year, the disruption that Covid-19 imposed on commercial real estate may create another large-scale dilemma.
To be clear, no one’s advocating for a sky-is-falling attitude. Also, it’s important to note that defensive stocks can be useful even in bull markets. If the Federal Reserve somehow manages to ease borrowing costs, government bonds won’t compete with public companies’ dividends.
Given the flexibility of this space, defensive stocks represent all-season tires for your financial vehicle. Below are a few ideas to consider.
Colgate (CL)
One of the top consumer goods companies, Colgate (NYSE:CL) makes for an easy idea among defensive stocks to buy. First, we can talk about its passive income. While its forward dividend yield of 2.23% isn’t exactly anything to write home about, its consecutive payout history of 61 years certainly is. This metric puts Colgate in the rarefied field of dividend kings.
Second, the company benefits from permanent relevance. No matter the outside conditions of the economy, people need to brush their teeth. On a cynical level, if household budgets become constrained, people will need to prioritize personal care products such as the ones Colgate offers. Otherwise, they could suffer consequences that may be costly.
Financially, CL stock is neither undervalued nor overvalued. While it might not be a screaming deal, Colgate’s robust margins and consistent profitability rate as top attributes, especially in the current environment. Analysts rate shares a consensus strong buy with a $90.93 price target, implying over 5% upside potential.
McDonald’s (MCD)
Owning the title as the world’s largest fast-food restaurant chain, McDonald’s (NYSE:MCD) makes a strong case for compelling defensive stocks. With its core business of providing comfort food quickly and at a cheap price, the Golden Arches benefits from a balanced business model: it’s part discretionary retail but it’s also a defensive play in that it leverages a universally popular brand.
Let’s face it – circumstances would have to get truly foul for people to skimp on the occasional trip to Mickey D’s. Further, McDonald’s has a few intriguing tricks up its sleeve. In particular, the company’s CosMc’s coffee-centered concept should rise in demand. With society fully normalizing from the Covid-19 days, the commercial environment may rebound.
If so, more foot traffic may pour in as worker bees come and get their caffeine fix.
Like Colgate, I wouldn’t call McDonald’s forward yield of 2.24% anything truly impressive. However, the company does have 48 years of consecutive payout increases, making it close to dividend king status.
Home Depot (HD)
One of the top players among defensive stocks, Home Depot (NYSE:HD) is technically a retailer. However, it’s more like an economic benchmark, as InvestorPlace’s Michael A. Gayed pointed out recently. While all eyes focused on certain technology players, Wall Street should really pay attention to HD. Given its importance to the broader economy – particularly the housing market – the company’s financial print provides a better pulse of what’s really going on.
To be sure, you’re probably not going to get rich off of Home Depot. However, during bouts of uncertainty, HD stock provides some reassurances with its forward yield of 2.42%. No, it’s not the greatest payout. However, it’s above the consumer discretionary sector’s average yield of 1.89%. Also, the payout ratio of less than 55% is compelling, suggesting yield sustainability.
As for the financials, HD stock ranks a bit on the pricey side. However, for that price, you get an outstanding return on invested capital (ROIC) of 29.28%. As well, the company’s three-year revenue growth rate stands at 7.5%, beating out almost 76% of its peers.
IBM (IBM)
As the world’s attention remains fixated on artificial intelligence and the companies that facilitate this wave of digital innovation, IBM (NYSE:IBM) has generally gone unnoticed. That’s a real shame. From the beginning, Big Blue has been pouring research and development dollars into AI and machine learning. Still, it’s attempting to make up for lost time.
Since the beginning of the year, IBM gained 15% of equity value – an auspicious start for the legacy tech giant. Even better, over the past 52 weeks, shares have gained over 42%. During this time, I’ve been pounding the table on Big Blue. I’ll continue to do so. With innovations such as Watson, the tech firm helps its enterprise-level clients extract practical solutions from digital intelligence.
While you’re waiting for the narrative to marinate, you can take advantage of the robust forward dividend yield of 3.58%. This stat clocks in well above the tech sector’s average offering of 1.37%. Also, IBM commands 28 years of consecutive payout increases, providing confidence during these shaky times.
AvalonBay Communities (AVB)
Structured as a real estate investment trust or REIT, AvalonBay Communities (NYSE:AVB) invests in apartments. Per its public profile, the company focuses on major metropolitan areas on the East Coast and California. It’s also the third-largest owner of apartments in the nation. With many people priced out of the residential real estate market, AvalonBay enjoys a cynical upside catalyst.
To be frank, it kinda stinks that the natural social cycle of homeownership has been disrupted. But it is what it is – and AVB can potentially rise as one of the top defensive stocks. Basically, people need a roof over their heads. In that sense, AvalonBay may have pricing power.
As for the financials, AVB stock isn’t exactly a compelling discount. However, it does have decent ROIC and it’s unsurprisingly consistently profitable. This dynamic translates into passive income, with AvalonBay delivering a forward dividend yield of 3.88%.
Analysts rate shares as a consensus moderate buy with a $193.41 average price target. That implies more than 10% upside potential.
Pfizer (PFE)
A pharmaceutical giant, Pfizer (NYSE:PFE) ordinarily would make an easy inclusion on a list of defensive stocks. However, following the Covid-19 crisis, the narrative is much trickier. Sure, the company initially benefited very handsomely due to contributing a vaccine for the SARS-CoV-2 virus. However, with fears of the pandemic fading very quickly since the beginning of 2022, PFE stock has struggled for momentum.
Still, Guggenheim analysts recently initiated coverage of PFE stock with a “buy” rating. In addition, they forecasted a $36 price, implying a significant upside from here. With expectations for the company’s Covid assets having now appropriately come down, the experts see an avenue for Pfizer to successfully commercialize large potential opportunities. These include treatments for bladder cancer and respiratory syncytial virus or RSV.
On the passive income front, the pharma delivers a forward yield of 6.05%. That’s well above the healthcare sector’s average yield of 1.58%. With 14 years of consecutive payouts under its belt, Pfizer deserves consideration for defensive stocks to buy.
Universal Corp (UVV)
One of the world’s leading tobacco merchants, Universal Corp (NYSE:UVV) might not immediately strike an investor as a candidate for defensive stocks. After all, anti-tobacco advocacy groups have succeeded in divorcing the enticing image that cigarette smoking had for prior generations. Still, even with the regulatory spotlight, tobacco remains a big business. And Universal is performing quite well.
For the fiscal year ended March 2023, the company posted revenue of $2.57 billion, up from the $2.1 billion posted a year prior. Further, in its latest earnings report (for the quarter ended December), Universal rang up sales of $822 million, up 3.4% against the year-ago level. Also, net income landed at $53 million, up 26.2% year-over-year.
What’s really attractive for investors is Universal’s forward yield, which stands at 6.48%. This metric puts a country mile between it and the consumer staple sector’s average yield of 1.89%. Also, Universal commands 54 years of consecutive dividend increases. That’s consistency you can trust, making UVV a top candidate for defensive stocks.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
