5 Top Defensive Stock Picks for an Uncertain Market

I wouldn't pass judgment if the market volatility of the past two months convinced you to stay out of stocks. Making such a decision, however, might be the most costly mistake you'll ever make.

Instead of putting your hard-earned cash into federally insured accounts, or simply stashing it under your mattress, I suggest checking out some of the best defensive stocks our Rising Stars program has churned out over the past 10 months.

Below, I've highlighted five of our analysts' favorite stocks to ensure that your portfolio can weather the storm of uncertainty that's overshadowed our markets lately.

Philip Morris International (NYSE: PM  )
Fool analyst Dan Dzombak made his case for Philip Morris back in late February: "Philip Morris is the most powerful tobacco company in the world, with seven of the world's top 15 brands, including top-seller Marlboro. The company has an estimated 27% market share in its world markets -- excluding China, where only government-owned China National Tobacco is allowed to operate, and the U.S., where the company's former parent, Altria (NYSE: MO  ) , is dominant."

This cigarette maker has performed exceptionally well since Dan recommended it six months ago, thumping the market by more than 20 percentage points since March 1 -- along with its above-average 3.6% dividend yield.

Philip Morris was a buy back in March, and Dan still holds it now -- meaning it deserves a place on your watchlist.

Abbott Laboratories (NYSE: ABT  )
Back on Feb. 25, Rex Moore tagged this medical specialist for his Rising Star portfolio.

Rex reasoned that Abbott was a safe, low P/E stock that had a high-yielding dividend: "It will be fun to explore the actual businesses in greater detail in future articles, but the highlights are easy. [Abbott has] been around for over 120 years and offers a broad -- make that, outstanding -- variety of consumer, health care, and pharmaceutical products."

Abbott, like Philip Morris, has held up exceptionally well since Rex wrote about it. It is beating the market by more than 15 percentage points, and it, too, offers a substantial dividend yield of 3.7%.

PepsiCo (NYSE: PEP  )
Alyce Lomax is handily beating her Rising Star counterparts by focusing on socially responsible investing.

She singled out Pepsi for her portfolio for a number of reasons. Chief among them are the efforts of CEO Indra Nooyi to diversify Pepsi's workforce and turn its Frito-Lay brand into a more eco-friendly venture.

Alyce goes on to say: "Pepsi's also got plenty of international growth in the works, targeting areas like Russia and China. Nooyi recently told BusinessWeek magazine that emerging markets make great 'learning labs,' through which Pepsi can devise new products and services."

Like the other two candidates thus far, Pepsi is soundly beating the market since being recommended -- this time by more than 10 percentage points. It also sports a healthy 3.2% yield for dividend-lovers.

  • Add Pepsi to your watchlist.

Johnson & Johnson (NYSE: JNJ  )
Medical conglomerate Johnson & Johnson holds the distinct honor of being the only truly defensive stock to be recommended by two different Rising Stars in our program. On Feb. 25, Rex Moore picked J&J for his portfolio; on March 24, Anand Chokkavelu followed suit.

Anand, in particular, appreciated the way this behemoth of a company gives relative autonomy to all of its moving parts:

The secret to [Johnson & Johnson's] ability to offer so many health-care products so effectively is its decentralization. It allows for entrepreneurial activity under the umbrella (and financing costs) of a AAA-rated balance sheet. That's a powerful combination when done correctly.

Johnson & Johnson is beating the market by more than 15 percentage points for both Rex and Anand, who are both holding their shares and collecting the company's sweet 3.5% dividend yield in the process.

Our best defensive stock
The final stock that our Rising Stars have picked as a great defensive play happens to also have a special place in Fool co-founder Tom Gardner's heart.

He has selected the stock as one of his five "Core" stocks in his Stock Advisor service. Since selecting it in 2002, Tom's pick of this stock is whooping the market by 70 percentage points! If you'd like to find out what this stock is, I encourage you to read The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." Inside, you'll find out about not only Tom's defensive pick, but also a high-growth stock that aims to be the e-tailer of the future. The report is yours today, absolutely free!

Fool contributor Brian Stoffel owns shares of Johnson & Johnson. The Motley Fool owns shares of Abbott Labs, Johnson & Johnson, Philip Morris International, Altria Group, and PepsiCo. Motley Fool newsletter services have recommended buying shares of Abbott Labs, J&J, PepsiCo, and Philip Morris International, as well as creating diagonal call positions in J&J and PepsiCo. 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.


Read/Post Comments (28) | Recommend This Article (86)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 31, 2011, at 1:51 PM, mm5525 wrote:

    PM declares the next dividend on 9/14. Look for @$0.06 increase. They did it last fall, and they have far better EPS here in 2011 than they did in 2010 and maintain a 60+% payout ratio to shareholders. My math says it's more likely to be a $0.07125 increase, but we'll see. It's all good in the end.

  • Report this Comment On August 31, 2011, at 1:54 PM, TMFCheesehead wrote:

    mm5525-

    Good to know, I'll keep my eyes open.

    Brian Stoffel

  • Report this Comment On August 31, 2011, at 2:24 PM, mm5525 wrote:

    With all the growth in the Asia-Pac region they've had, and is sure to come as the middle class continues to rise there, (as well as the general population), I can only imagine PM's 60+% dividend payout ratio a few years from now. PM offers growth, defensiveness, and yield protection. Oh, and 5 billion a year in buybacks and no exposure at all to US regulations, exposure to the FDA, etc. I sleep very well at night with PM being by far my #1 holding. Good article, Brian +1 rec.

  • Report this Comment On August 31, 2011, at 4:44 PM, Stoneaa wrote:

    Perfect picks and they have all low beta ratios. Here are 13 additional defensive stocks with low beta ratios and high dividend yields:

    http://t.co/ynzyOwx

    The average price to earnings ratio (P/E ratio) of the list amounts to 16.86. The dividend yield has an average value of 5.40 percent. Price to book ratio is 4.49 and price to sales ratio 2.26. The average operating margin amounts to 17.38 percent.

  • Report this Comment On August 31, 2011, at 4:53 PM, Eveo5 wrote:

    Take a look at EU and DAX , no need to comment

    ex. EONAG

    Fundamental Key Figures

    Dividend / Special dividend (2010) 1.50 / -

    Dividend Yield in % 9.83

    Price Earnings Ratio 5.22

    Earnings per Share (gross) in € 4.19

    Earnings per Share (net) in € 2.93

    Number of Shares 2,001,000,000

    Market Capitalization in m. € 30,525.26

    Freefloat Market Capitalisation in m. € 29,066.15

  • Report this Comment On August 31, 2011, at 4:57 PM, Eveo5 wrote:

    or even better

    RWE @ div yiled 13%

    Dividend / Special dividend (2010) 3.50 / -

    Dividend Yield in % 13.38

    Price Earnings Ratio 4.45

    Earnings per Share (gross) in € 8.85

    Earnings per Share (net) in € 5.88

    Number of Shares 523,405,000

    Market Capitalization in m. € 13,687.04

    Freefloat Market Capitalisation in m. € 10,732.01

  • Report this Comment On August 31, 2011, at 6:02 PM, TMFCheesehead wrote:

    @stoneaa-

    Interesting list. Small world too, as the Koss family of KOSS is from the same neighborhood I grew up in. Played ball with some of their kids. Good people!

    @Eveo5-

    Can't say that I'm familiar with either stock.

    Brian Stoffel

  • Report this Comment On August 31, 2011, at 9:08 PM, rgperrin wrote:

    Tobacco is under constant fire. I wonder how long it can survive in a world increasingly dedicated to its destruction? But then, the question (or concern) itself is more than 40 years old.

  • Report this Comment On August 31, 2011, at 10:17 PM, TMFCheesehead wrote:

    rgperrin-

    From what I understand, the biggest legal pressure is from within the United States, which PM does not serve. Their former parent company, Altria, sells in the US. PM takes most of the foreign markets.

    Brian Stoffel

  • Report this Comment On August 31, 2011, at 10:21 PM, PeyDaFool wrote:

    "[Alyce] singled out Pepsi for her portfolio for a number of reasons. Chief among them are the efforts of CEO Indra Nooyi to diversify Pepsi's workforce and turn its Frito-Lay brand into a more eco-friendly venture."

    Oh give me a break. Alyce would endorse a BP oil-tainted blue heron if it was standing by a solar panel. Calling Pepsi a socially responsible company is reporting that Budweiser is sponsoring AA meetings.

    Face it, Alyce. Socially responsible investing, snack food companies and obesity have nothing in common.

  • Report this Comment On September 01, 2011, at 12:20 AM, concealedweaponR wrote:

    and the main defensive pick is no where to be found on the list.

  • Report this Comment On September 01, 2011, at 7:20 AM, bordereiver wrote:

    So even tho I signed up for duke street, do I need to send my email to you to get the 5th pick? Or is it MO since listed on right side of page. I know you like to Be foolsters but I would also like to get the information itself, not just play around.

  • Report this Comment On September 01, 2011, at 9:52 AM, midnightmoney wrote:

    "Socially responsible investing, snack food companies and obesity have nothing in common."

    Fact.

  • Report this Comment On September 01, 2011, at 10:11 AM, TMFCheesehead wrote:

    @bordereiver-

    The last pick is not MO. If you have Duke Street, I suggest going to the Stock Advisor pages and seeing which one of Tom's Core picks was made all the way back in 2003, and that'll give you your answer.

    Brian Stoffel

  • Report this Comment On September 01, 2011, at 11:41 AM, chitowndave wrote:

    I just put NGG into my IRA, I love the 6% Div I'm getting!

  • Report this Comment On September 02, 2011, at 11:36 AM, stopcrossselling wrote:

    Can we stop playing games like find the 5th stock. My firewall wont let me go thru the maze of links...

  • Report this Comment On September 02, 2011, at 12:23 PM, nickleback wrote:

    Just today there's an article "Should You Get Out of JNJ Before Next Quarter?" How does that sentiment change in 2 days?

  • Report this Comment On September 02, 2011, at 12:40 PM, newageinvestor wrote:

    I'm finding that ConEd is the best performer by far in my portfolio since these meltdowns have started. It's up almost 10% since I bought it earlier this year, doesn't drop a lot in the roller coaster ride we've been on AND has a great dividend. National Grid is nice, but ConEd is doing better right now in this environment.

  • Report this Comment On September 02, 2011, at 1:18 PM, kayeschultz1 wrote:

    Look at the disclosure paragraph at the bottom.

  • Report this Comment On September 02, 2011, at 1:23 PM, fool3090 wrote:

    Good companies, certainly. But I went the ETF route. I deserately needed diverisification, so I'm buying on dips VIG, the Vangaurd Dividend Appreciation exchange traded fund. Some will scoff, certainly. However, IMO it's a better strategy to build core defensive sectors. VIG comprises 127 companies that have a track record of increasing dividends. Held in a taxable account, it has yielded an average total return over the past 3 years of 5.84% (and 29.43% one year return). Top holdings: McDonalds, IBM, Chevron, Coke, ConocoPhilips, United Tech, Exxon, Pepsi, P&G, Walmart. its top 10 represents 41% of total net assets. Compared to the Russell 3000, VIG is overweighted in consumer defensive, industrials, energy -- and underweighted in financials, health care, real estate, tech and communication. Pretty much the same ratio in basic materials and consumer cyclical. Bought it at 49 during the meltdown two weeks ago. So far so good. VIG isn't for everyone. The dividend yield is 2.2%... not great, but it adds some stability to my portfolio, which was telecom / financial / small cap heavy. Just an idea to diversify a core holding for these scary times. I opted for it over VYM or other higher yielding ETF, as they are heavy in telecoms and financials, which I need less of. (Disclosure: long VIG, with outstanding market order at 49)

  • Report this Comment On September 02, 2011, at 2:13 PM, MrPlunger wrote:

    Is something wrong with TMF?

    The ETF I mean, not you guys.

    Having some bonds that will go up is surely a better defensive play than trying to find stocks that will go down less than others?

  • Report this Comment On September 02, 2011, at 2:29 PM, TMFCheesehead wrote:

    @nickleback-

    Like kayeschultz1 said, We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

    Brian Stoffel

  • Report this Comment On September 02, 2011, at 2:31 PM, WineHouse wrote:

    I eschew oil and tobacco companies for ethical (political?) reasons. There is no need to feel guilty about one's income or profit sources!

    Having said that, I've been "defensive" with my investments regardless of how the stock market behaves. After all, I don't have a crystal ball -- why take risks today when you don't know how it'll turn on you tomorrow? By the time it "turns," it's too late to back out of a position!

  • Report this Comment On September 02, 2011, at 2:39 PM, fool3090 wrote:

    My bond positions are good. I just was way too far exposed in financials (thinking they were "safe" and paid good dividends... silly me!) and way too overweighted in telecom and small caps (am a TMF Hidden Gems member. Needed some core holdings for balance. Portfolio was the classic barbell: too heavy on bonds at one end and too heavy on risker equities on the other. VIG, while risky because it's equities, is less risky than exposure to individual shares and comprises some great companies that I can't buy individually at meaningful amounts because I don't have tons of cash sitting around. I'd rather have a basket of 127 dividend payers who raise their returns than one or two firms. In scary times, I opt for the safety of diversity with the bonus of appreciation. Maybe I'm wrong -- but VIG allows me to sleep better rather than get rattled by AT&T and its misadventure with T-Mobile, or wondering if CenturyTel will be around in 10 years, or reading some other horrid account of too-big-to-fail banks facing massive penalties for being stupid, greedy and arrogant. VIG works for me. It might not work for others.

  • Report this Comment On September 03, 2011, at 7:53 AM, birder1500 wrote:

    I am sort of thinking that now is the time to begin going on the offense. Maybe some stocks like RVBD for example.

  • Report this Comment On September 04, 2011, at 3:27 PM, ChrisJanO wrote:

    Phillip Morris & Tobacco Companies Kill Over 500,000 Americans Yearly!

    Why would any Intellegent Person want to be part of that, or Profit from it?

  • Report this Comment On September 05, 2011, at 11:43 AM, 48ozhalfgallons wrote:

    rgperrin:

    Tobacco must always be under fire to enjoy its pleasures.

  • Report this Comment On September 06, 2011, at 12:40 AM, blearynet wrote:

    I cannot in good conscience buy tobacco stocks. Period. Have to find other investment choices, cuz that one is not happening. It is not necessary...there are better choices out there that are not despicable.

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