These Stocks Could Keep You From Going Broke During the Next Market Crash
Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As 2013 rolls along, enthusiasm and exuberance on Wall Street are picking up -- notwithstanding volatility levels that have recently been on the rise. With CNBC anchors and an army of brokers touting the new all-time highs that were hit in the S&P 500 and Dow Jones Industrial Average in May, it can be easy for the average investor to get swept up in the excitement of the bull market. This would not be a wise decision.
As Warren Buffett famously said, "be fearful when others are greedy, and greedy when others are fearful." Investors need to ask themselves if the market rally is the result of organic, honest economic growth and recovery, or if the rise in asset prices is just another bubble being blown by Ben Bernanke and his minions at the Federal Reserve.
The Fed's balance sheet has already ballooned to grotesque levels, the national debt continues to skyrocket, and sooner or later, confidence in the U.S. Dollar may completely crumble -- particularly if the economy hits the skids again. Additionally, the bond market has become an obscene bubble as a result of Fed policy and the only trade in hedge fund land over the last few years has been to front-run the central bank (Do you think they won't sell when the liquidity dries up?).
Investors who are concerned about the potential prospects for the economy and markets going forward need to protect themselves. While it would probably be a bit premature to exit equities entirely at this point, investors may want to focus on high-quality defensive names that pay out generous dividends. Below, is a brief overview of three stocks that fit this description to a tee.
McDonald's (NYSE: MCD) - This was a terrific stock to hide out in during the financial crisis. McDonald's is in a sweet spot in that the company has both growth and defensive properties and the stock is currently yielding 3.20%. During difficult economic times, McDonald's low-cost offerings actually become more appealing to consumers. Conversely, the company's expanding international footprint becomes more attractive to investors when the economy is doing well. Although the stock is not exactly cheap at a little less than 16 times forward earnings, the company's high-quality pedigree and history of creating shareholder value would seem to justify the price. Do not be surprised if this stock actually heads higher if volatility returns to the U.S. market in a major way.
Wal-Mart (NYSE: WMT) - This is another company whose business actually benefits from difficult economic times as consumers trade down from higher priced stores. Hardly any other companies can compete with Wal-Mart on price or scale, and this gives the world's largest retailer a major advantage when consumers are feeling the squeeze. From a technical perspective, Wal-Mart is also interesting. The stock was range-bound for the better part of a decade before breaking out in May and June of 2012. Shares are currently trading near all-time high levels, and the chart suggests that Wal-Mart may have more room to run. In addition to its high-quality, defensive business, investors will also find the stock's 2.50% dividend yield attractive.
Reynolds American (NYSE: RAI) - This company manufactures Camel cigarettes in the United States through its R.J. Reynolds subsidiary. The business is very stable, but Reynolds American has not been able to boost its top-line in recent years. The company makes up for this, however, by paying out a very generous dividend and focusing on margin expansion. At current levels, the stock is yielding around 5.20% and has also delivered extremely impressive price appreciation. Over the last 10 years, RAI has risen more than 426% and in the last 5 years the stock is up better than 75%.
Trying to time the next market collapse is a foolhardy endeavor. Nevertheless, prudent investors should probably consider getting more defensive as exuberance and excitement ratchet up on Wall Street. The bull market is already very long in the tooth and there are any number of scenarios that could send the economy, and the markets, into another tailspin. Investors who are primarily concerned with capital preservation may want to consider rotating out of more cyclical sectors and into high-quality, defensive stocks that pay a healthy dividend.
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Ryan Glosier has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of McDonald's. 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!