The stock market has had a record run in 2019, with the S&P 500 rising 17% year-to-date, and it’s still just early May.
Of particular importance, the big 2019 rally in stocks has been characterized by unusual placidity. Year-to-date, the S&P 500 has dropped 2% or more off its highs only three times, with the biggest downdraft being a 2.5% correction at the very beginning of the year. Historically speaking, the stock market usually experiences 5%-plus pullbacks roughly three to four times a year. Thus, relative to the past, the 2019 rally in stocks has been unusually calm.
Investors shouldn’t be lulled to sleep by this placidity. You can count on volatility rearing its ugly head in stocks as much as you can count on the sun rising every morning. Thus, volatility is coming to the stock market. It isn’t a matter of if. It’s a matter of when.
A good rule of thumb in investing is as follows: when the good times are rolling, prepare for the bad times. Why? Because volatility rearing its ugly head usually happens out of the blue. The bust usually follows a boom.
With this in mind, let’s take a look at seven stable stocks worth considering for protection from the next stock market pullback, which history says is due soon.
At the top of this is fast-casual restaurant giant McDonald’s (NYSE:MCD) for three reasons: low beta, high yield, and a long history of dominance in a stable growth restaurant category.
First, this stock has a very low beta at just 0.35. By itself, that’s a low beta. But it is especially low considering McDonald’s also gives you consistent and steady revenue and profit growth on top of that low beta. In other words, you have stable growth with mitigated historical volatility.
Second, there’s the 2.2% dividend yield, which is above the market average. That 2.2% yield, too, looks really good on top of consistent and steady revenue and profit growth.
Third, McDonald’s has, still does, and will continue to dominate the global stable growth restaurant category. Broadly speaking, McDonald’s is the king of high convenience and low prices, and at the end of the day, those are the only two things that truly matter in fast food. McDonald’s is continuing to invest and innovate to maintain those price and convenience advantages. So long as they do, this company will be the dominant player in the global restaurant industry, and MCD stock will be a steady riser.
American Electric Power (AEP)
When it comes to avoiding volatility, few stocks do it better than utility stock American Electric Power (NYSE:AEP).
When it comes to high-yield utility stocks with stable fundamentals, American Electric Power is in a league of its own. The company provides electricity services to more that 5 million Americans across 11 states. Demand therein is exceptionally stable, because consumers will forever need electricity services. Ultimately, the business supports steady and consistent revenue and profit growth in a long term window.
Further, the beta on AEP stock is ridiculously low at 0.17, meaning that the stock has exceptionally limited systemic risk (if the market drops, it doesn’t necessarily mean AEP stock is going down with it). The yield is robust at 3%, meaning investors get paid to inherit limited risk on steady profit growth.
All in all, AEP stock is one of the best stable stocks to buy if you’re looking for safety and protection.
Source: Baron Valium via Flickr
Media giant Disney (NYSE:DIS) is one part growth stock and one part stable stock, and that makes it an attractive stock to own for investors seeking to mitigate risk without compromising too much on the potential return side of things.
On the growth side, Disney is pivoting aggressively from linear television to internet television, and in so doing, is creating a streaming service that puts at least one part of the company on a potential supercharged Netflix (NASDAQ:NFLX) growth trajectory. If this streaming service takes off, this stock could fly high as cord-cutting concerns are laid to rest, and investors turn their attention towards streaming subscriber additions.
At the same time, Disney is a stable stock because it’s a media giant with a portfolio of high-quality content with enduring appeal. Regardless the channel of consumption, consumers always find a way to watch Disney content. That has been the case for several decades. It will remain the case for the next several decades, too. Consequently, stable and enduring demand is the backbone of DIS stock.
Ultimately, this combination of stability and growth potential makes DIS stock a top-notch stock to consider for protection against a market downturn.
Stable Stocks Worth Considering: AT&T (T)
Over the past several years, shares of telecom giant AT&T (NYSE:T) have been dragged lower by a huge and growing debt load, slowing growth in its core business, and concerns regarding the longevity of its services.
All these concerns have plunged AT&T stock into dirt cheap valuation territory. The dividend yield is up at 6.6%, which is essentially a five year high. Meanwhile, the forward earnings multiple is around 8.5, and that’s near a five year low. In other words, you have a single-digit P/E multiple stock trading at a five year low valuation, with a dividend yield that is nearing 7% and at five year high levels.
At those valuation levels, AT&T simply needs stabilization in order for the stock to work here. Stabilization is exactly what will happen over the next several years. Sure, cord cutting will persist. But the company will more aggressively pivot into building out DirecTV Now, and simultaneously up internet connectivity costs to offset cord cutting weakness. Meanwhile, the 5G boom will provide a nice tailwind for the wireless business, which should help offset continued wire-line weakness.
Broadly, operations should be stable going forward, and stable operations on a single digit P/E stock with a near 7% yield is an attractive combination.
Semiconductor giant Intel (NASDAQ:INTC) often gets thrown into the growth stock category given its exposure to secular growth markets. But Intel is just as much “stable stock” as it is “growth stock”, and that makes INTC a winning pick for defensive investors still looking for healthy return potential.
In the big picture, Intel is the 200-pound gorilla in the semiconductor market. They pretty much dominate everywhere it matters, and project to keep dominating as the market extends into data-centers, AI, machine learning, so on and so forth. Thus, demand for Intel’s chips projects to remain stable for the foreseeable future.
At the same time, secular growth drivers in data and AI markets could turn stable demand into stable and growing demand. That dynamic, on top of a stock with a 0.41 beta and 2.4% yield, should produce healthy risk-adjusted returns for investors.
Last, but not least, on this list global beverage giant Coca-Cola (NYSE:KO). Much like McDonald’s, Coca-Cola is a strong defensive buy for three reasons: low beta, high yield, and stable fundamentals.
KO stock has a low beta of 0.29, and that low beta comes on top of a company that is able to produce healthy and consistent profit growth year after year. Further, the dividend yield stands north of 3%, which is equally impressive considering the underlying profit growth trajectory.
This stable profit growth at Coca-Cola is supported stable growth fundamentals underlying the business. Long story short, consumers need to drink, and Coca-Cola gives them what they want to drink. For a long time, that was sugary carbonated beverages, so Coca-Cola made a wide variety of Coke-based products. Now, its athletic drinks, teas, and sparkling waters, so Coca-Cola has acquired a wide variety of drinks in those categories, and given them global distribution.
Net result? Revenues and profits have remained on a healthy uptrend, despite an adverse change in consumer preference. This trend should broadly continue, so as long as consumers have a need to drink, Coca-Cola should remain a steady grower.
As of this writing, Luke Lango was long MCD, AEP, DIS, NFLX, T, and INTC.
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