As The Market Nears Its All-Time High, Should Investors Get Defensive?

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In October 2007, the Dow Jones Industrial Average hit its all-time high of just over 14,000.  Unfortunately, most people know all too well what followed:  the Great Recession, which took the Dow down to less than 7,000.  The market’s performance since that time has been nothing short of spectacular.  Shares of America’s blue chips have more than doubled since the March 2009 lows.  The Dow is now only a few hundred points of breaching its all-time high again.  The question for many investors now is whether the market can sustain its run.  Conversely, perhaps the Dow has gone too far too quickly, and is now ripe for a decline.

The Truth is: Nobody Knows For Sure

Unfortunately, no investor has a crystal ball.  Despite what some would like to believe, no individual can predict the future.  I can’t pretend to know exactly which direction the market is headed.  The good news for me is that I don’t have to.  I strive to make investment decisions that I can live with no matter where the market goes.  To that end, as the market approaches its all-time highs, I’m looking for stocks that are defensive in nature.  As the market continues to climb, the stocks I’m interested in adding to my portfolio provide products that are purchased regardless of the prevailing market conditions.

Johnson & Johnson (NYSE: JNJ) is a $200 billion pharmaceutical giant.  The company has a diversified business line of medical devices, pharmaceutical medicines, and consumer products.  It has a wide variety of well-known consumer products including Band-Aids and Listerine.  In 2012, Johnson & Johnson raised its dividend for the 50th year in a row.  The stock trades at an attractive forward price-to-earnings ratio of 12 times and yields more than 3% at current prices.

ExxonMobil (NYSE: XOM) has the largest market capitalization in the world, which currently sits at over $400 billion.  For the first nine months of 2012, Exxon Mobil reported that revenues nudged up a little more than a half percent, and earnings per share were more than 16 percent higher as compared to a year ago.   In addition, the company raised its dividend in 2012 for the 30th consecutive year.  The current payout is a solid 2.5% yield at current prices, and the stock trades for a trailing price-to-earnings ratio of less than 10.  Furthermore, the financial position of ExxonMobil is extremely strong:  the long-term debt to equity ratio is a minuscule 5%.

Kimberly-Clark (NYSE: KMB) is a consumer products giant with a market value north of $33 billion.  The company holds classic American brands including Kleenex, Huggies, and Cottonelle.  Last year, the company raised its dividend for the 40th year in a row.  Moreover, the company has paid dividends for 78 straight years.  Kimberly-Clark trades at a reasonable forward P/E ratio of 14 times.  The company guided investors to expect dividend growth in the high single digits going forward.

The Bottom Line

It’s impossible to know whether we’re on the precipice of the next great market run, or whether the economy is on the brink of another headwind.  I’m invested for the long term, meaning I’ll be an owner of stocks for the next several decades.  As Warren Buffett famously quipped, my ideal holding period is forever.  Stocks that provide an ever-increasing stream of profits and dividends are my favorite investments.  With the Dow nearing its all-time high, the three aforementioned stocks will be on my watchlist as a great way to both keep equity exposure as well as reduce volatility.


Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson and Kimberly-Clark. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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