Defend Yourself From the Double Dip With These 5 Stocks

Right now, thousands of people are packing up their cars, filling up their gas tanks, and hitting the roads for vacation. And the topic they'll surely discuss on those long car rides is ... the economy!

Well, maybe not, but people are growing worried. Using Google search trends, you can look into the collective searches of millions of people around the U.S. 

The number of searches for "double dip" has roughly quadrupled since May! Now, searches aren't predictive of the future, otherwise Google (Nasdaq: GOOG  ) would be the world's greatest investor, and it certainly is not.

I'm not sounding the alarm bells of panic simply to sound the alarm bells of panic. With the market down about 10% over the past three months and concerns over Europe's debt crisis, China's slowing economy, and the BP spill still in the forefront of news, investors have every right to be concerned. Rather, today's economic climate should be a reminder that you should always keep your portfolio prepared to weather tough times.

With people so worried, some of the largest stocks in the U.S. are priced as though a double-dip recession is imminent. Of the largest 25 stocks in the S&P 500, more than half are priced at or less than 12 times expected 2010 earnings (cheap!) and all pay a dividend. These companies have the characteristics of defensive stocks.

Defensive stocks
There are two core qualities of defensive stocks:

  1. Reliable. These companies make the products that people buy even when their wallets are being pinched. In other words, shampoo, razors, medicines, or electricity for their homes -- and not cigarette boats.
  2. Dividends. Dividends mean you get a steady return from a stock regardless of what the market is doing. So, all else being equal, you enjoy a head start over the stocks that don't pay dividends.

Also, when you're looking for reliable companies that pay dividends, you want to make sure your company has paid its dividend steadily over a period of at least five years. Only then are you getting a track record you can trust.

Of course, there is one more core quality you should always look for.

  1. Cheap. You should be constantly vigilant of paying too high a price. As many in the U.S. housing market know, there is such a thing as too high a price. Demand a margin of safety from your stock buys, and you will often be rewarded.

So, with those as guidelines, here are five cheap, reliable defensive stocks that shouldn't let you down even when times get tough:

Company

Market Cap

2010 Est. P/E

Div. Yield

More Than 5 Years of Paying Dividend?

ExxonMobil (NYSE: XOM  )

$300B

10.3

3.0%

Yes

Microsoft (Nasdaq: MSFT  )

$218B

12.2

2.1%

Yes

Chevron (NYSE: CVX  )

$144B

8.5

4.0%

Yes

Pfizer (NYSE: PFE  )

$120B

7.0

4.9%

Yes

Intel (Nasdaq: INTC  )

$114B

11.1

3.1%

Yes

Exxon and Chevron have been smarting since the BP Deep Horizon spill and will most likely stay down until new drilling regulations are out of the courts and finalized. Among oil producers though, ExxonMobil is top dog.

Pfizer and the health-care sector in general have been beaten down by worries about unintended consequences of health-care reform and the Patient Protection and Affordable Care Act. With a 2010 P/E of just 7, however, the downside is more than factored into the stock's price. And there's more to like about Pfizer. The company bought Wyeth on the cheap during the market meltdown and may increase its dividend as it pays down the debt it took on for the acquisition.

Microsoft and Intel are inexpensive, no doubt about it. But while these two are cheap, some impressive investors, including Bill Miller, believe IBM (NYSE: IBM  ) is the most remarkably mispriced name in the market. All three are strong enough to be a part of your portfolio, but I'd take a special look at IBM.

Is this a good time to hop on a large-cap bandwagon, or do other companies catch your eye? Let us know in the comments box below!

Dan Dzombak does not have a position in any of the companies mentioned in this article. Intel, Microsoft, and Pfizer are Motley Fool Inside Value picks. Google is a Motley Fool Rule Breakers recommendation. The Fool has created a covered strangle position on Intel. Motley Fool Options has recommended buying calls on Intel. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Google. The Motley Fool has a disclosure policy.


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  • Report this Comment On July 13, 2010, at 12:02 PM, pondee619 wrote:

    "Defend Yourself From the Double Dip With These 5 Stocks" Are you expecting a double dip?

    "I'm not sounding the alarm bells of panic simply to sound the alarm bells of panic" You ARE sounding alarm bells of panic!?

    "I'd take a special look at IBM." But why isn't it your table of "...cheap, reliable defensive stocks that shouldn't let you down even when times get tough"?

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