5 "Necessity" Stocks That Could Protect Your Portfolio From Disaster

The new year has started off with a bang for many stocks. The S&P 500 is up 4.4% through the first two weeks of 2012 and most earnings reports so far haven't disappointed.

Still, two weeks isn't going to make up for the fact that Europe's debt woes are anything but fixed. Greece continues to stymie any progress made on its behalf, and Italy's 10-year lending rate is dancing dangerously close to the 7% level again. Countless concerns about whether China can slow its economy in an orderly fashion and whether the U.S. can lower its unemployment rate meaningfully and spur growth are still unanswered.

With all of these worries present, it's easy to get drawn into the euphoria of a few good weeks, but it's also smart to remember that choosing the right stocks means not having to worry about these prolonged economic maelstroms.

Keeping that in mind, I sought to uncover five stocks that would stand the test of time whether the global economy was booming or in a deep recession -- and today I'll share them with you.

These five stocks all provide necessity goods to consumers. Arguably a few of you will find my definition of "necessity" a stretch, but given the impeccable track records of these five companies, I find it hard to argue against buying these five stocks. Not surprisingly, with near-guaranteed income, all five provide a solid dividend as well.

Here they are, in no particular order:

Company

Necessity

Dividend Yield

Duke Energy (NYSE: DUK  ) Electricity 4.70%
American Water Works (NYSE: AWK  ) Water 2.90%
Chevron (NYSE: CVX  ) Oil 3.10%
Coca-Cola (NYSE: KO  ) Food 2.80%
Wal-Mart Stores (NYSE: WMT  ) Clothing 2.50%

Source: Yahoo! Finance.

Electricity
Arguably nothing is a necessity in this world outside of food and water, but electricity comes in very close behind those two. According to the U.S. Energy Information Administration, the average household used 11,496 kilowatt-hours' worth of electricity in 2010. This figure is only likely to go higher or, at worst, remain flat as everything in our lives becomes increasingly digitized and automated. Electrical usage is one of those necessities that doesn't budge very much whether or not the economy is booming or contracting, so utilities often make for excellent buy-and-hold investments -- and no utility speaks to me more than Duke Energy.

Duke Energy is still in the midst of a legal battle to acquire Progress Energy, which, if approved, would create the nation's largest electrical utility and save each company millions. Duke is all about consistency, with gross margin range bound between 62% and 65.5% over the past five years and operating margins at a record-high relative to the past decade. If not for Duke's spinoff of Spectra Energy, its former natural-gas business, in 2007, dividends would also be up in every year as well since 2005. With a real set-it-and-forget-it feel, Duke Energy has everything needed to let investors sleep better at night.

Water
Water is a considerably more precious commodity than many give it credit for. Admittedly, it's not something we can reasonably transport for a profit yet, but water is finite and it's one of the basic necessities for survival. When thinking of a play on water, I continue to come back to my "10 Mid Caps to Rule Them All" choice, American Water Works.

American Water Works has made it clear that its strategy involves growing by acquisition, but don't think that means the company is a slouch in the growth department. Revenue has increased in every year since 2006 and operating margins are currently at record highs. The key to the company's success has been seeking out reasonable growth opportunities while also controlling expenses -- something it's perfected to an art form. Even better for those of you who like a healthy dividend, American Water Works' payout ratio is the lowest among the water utilities, leaving it plenty of room to grow.

Oil
I'm sure there are some of you out there who choose not to drive a car and think oil isn't a necessity. But remember that oil also factors into the production of plastics, foams, cosmetics, paints, and a wide array of other products. There's a very good chance you have a handful of oil-based products in your household right now, which makes it an excellent necessity candidate. When thinking of oil, most investors choose ExxonMobil; I prefer Chevron.

To me, it makes more sense on paper. Chevron boasts a lower forward P/E, price-to-book, and price-to-cash-flow while also yielding almost a full percentage point higher than ExxonMobil. Chevron simply delivers for its shareholders with healthy dividend increases and billions in operating profits each year. In 2010, Chevron produced more than $31 billion in operating cash flow, a driving force behind Chevron's dividend increases, which have grown by an average of 8.8% over the past decade. You may not like Big Oil companies, but that doesn't mean they can't pad your portfolio.

Food
Next to water, food is the only other absolute necessity for survival, so we can reasonably expect spending in this segment to grow if not remain relatively consistent. With so many companies to choose from in the food sector, I tried to focus on the strength of a brand name and the desire of consumers to seek out that brand. This made Coca-Cola a no-brainer selection, even if its liquid portfolio of products is a tad bit of a stretch under the food category.

Voted as the top global brand name by Interbrand in 2011, beating out IBM and Microsoft, Coca-Cola is a model of consistency to which nearly all other companies are compared. The company has rewarded shareholders with 49 consecutive annual dividend increases and has tightly controlled its gross margin, which has been range-bound between 63% and 66% since 2002. Coca-Cola has the tools to grow globally and the deep pockets from its strong cash flow to make that happen. Best of all, Coca-Cola's low payout ratio of 34% practically ensures years of future dividend increases.

Clothing
For the sake of argument, I'm going to call clothing a necessary item. That doesn't mean we as a society need to go out and buy top-notch brand names, but we need the basics to go about our daily lives. Even though I could easily have chosen to put Wal-Mart in the food category, the company makes a better fit in that "everything else" category.

If you really want consistency in the bottom line, look no further than Wal-Mart. Over the past 10 years and two recessions, Wal-Mart increased sales and profits in each year. Wal-Mart's brand name and deep pockets have allowed it to undercut nearly all of its competitors on everything from clothing to electronics. Perhaps not the most exciting stock over the past decade, Wal-Mart has rewarded shareholders with an average annual dividend increase of 18%. What Apple is to the technology space, Wal-Mart is to the retail sector.

Foolish roundup
There you have it, folks -- five companies that handle the basic necessities of life. Do you have a favorite of the bunch, or perhaps one I left out? Share it in the comments section below.

Also, if you're looking for more stellar companies to complement these five, I invite you to download a copy of our latest special report, "3 American Companies Set to Dominate the World." In this report you'll find three companies hand-picked by our analysts set to dominate the emerging markets -- and best of all, this report is completely free for a limited time, so don't miss out!

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Coca-Cola, IBM, Microsoft, Wal-Mart, and Apple. Motley Fool newsletter services have recommended buying shares of Chevron, Coca-Cola, Microsoft, Wal-Mart, and Apple, as well as creating a bull call spread position in Microsoft and Apple, and creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 that believes transparency is always a necessity when it comes to investing.


Read/Post Comments (15) | Recommend This Article (59)

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 January 19, 2012, at 7:15 PM, desertcounselor wrote:

    I do care about the ethical nature of the companies which I invest in. In particular - I have never - and never will patronize Wal-Mart; they have destroyed too many businesses and communities. And I know how damaging it is for people to drink Coca-Cola; I am a student of good health, and to me Coke is poison, so I would never support that corporation.

  • Report this Comment On January 19, 2012, at 8:15 PM, kayakmastr wrote:

    It is the people who destroyed their own communities by choosing to save money rather the support their local small store owner. Wht about Home Depot? It is nothing like my local small hardware store, where I walk in and someone asks how they can help me, and then brings what I need to me. But of course I pay a bit more. Why is Coke a poison? Look at the calories in orange juice, now that is scary. I'm looking forward to zero calorie orange juice.

  • Report this Comment On January 19, 2012, at 8:20 PM, tomami wrote:

    I do not allow my ethical stances to interfere with my stock selections. I have no trouble purchasing shares of stock for profit when i know the people who consume liquor, soft drinks, candy, tobacco, fatty foods, or shop in either WalMart or Tiffiany's do so knowing how bad it is for them to buy or engage in these activities. I am not their policeman. I personally do not drink soft drinks or smoke or drink liquor but I sure will buy the stock. I would not classify your selection of Coca Cola as food but it is a source of comfort food for millions as coffee and cigarettes are for others. So, I suppose you could substitute any stock in that slot for "comfort food" or personal enjoyment stock. If so, I would chose Phillip Morris. (my personal favorite cash cow). LOL

  • Report this Comment On January 20, 2012, at 12:49 AM, mikecart1 wrote:

    kayak,

    Coke is a person because it can be used to dissolve battery acid or if you have a spare tooth laying around, that too!

  • Report this Comment On January 20, 2012, at 6:32 AM, jhilluk wrote:

    11,496 kilowatt-hours or 11.496 KWh?

  • Report this Comment On January 20, 2012, at 10:45 AM, tweenthelines wrote:

    Your picks are solid "commodity" types and with the possible exception of KO, dependent on high levels of CAPEX and Debt financing. For a long view, "growth&income" types couched in innovation and growing from within without adding debt is appropriate for a longer view.

    I recently sold off 20% of CVX holdings and have a watch list of dividend innovators to purchase subsequently.

    Disclosure: long CVX.

  • Report this Comment On January 20, 2012, at 9:44 PM, tkell31 wrote:

    What a bunch of nuts. Yes, clearly Coke is poison. Lol what does that make beer? Maybe we should all be wrapped in bubble wrap, not be allowed to do anything that might hurt us. Obviously white sugar should be illegal, chocolate should get you the death penalty...all because fat people in the US have zero self control and are too lazy to exercise. Hey, here's an idea the govt can mandate our days including what we eat, exercise, read and think...all to make sure nothing "bad" ever happens to us.

  • Report this Comment On January 21, 2012, at 4:25 PM, PoundMutt wrote:

    cOFFEE IS THE SINGLE GREATEST SOURCE OF ANTOXIDENTS

  • Report this Comment On January 21, 2012, at 4:27 PM, PoundMutt wrote:

    OOPS, for the last one!

    Coffee is the single greatest source of antioxidants in the American diet!

  • Report this Comment On January 22, 2012, at 2:15 AM, kahunacfa wrote:

    Water and water scarcity has been a Macro-investment theme around since the mid-nineteen seventies. The water investment theme was first presented by Kidder Peabody & Company Research in the mid-nineteen seventies. American Waterworks was one vehicle to ride. Others were water investment Limited Partnerships, other public water utilities and water well drilling and service companies such as Ditch Witch.

    As an experienced portfolio manager <1974-Present> my basic comment is: 1. Nothing New Under the Sun, 2. Investment Themes once forgotten almost always reappear with a new generation of investors.

    One of Warren Buffett's greatest strengths as an investor is that he like, Kahuna,CFA, has seen it all. Just waiting for the next AOL Internet Bubble to come along and peak like it did in the year 2000. Remember all the fears that the World as- we-knew-it would come to an end when the year clock left the nineteen hundreds. The only thing I noticed is that the Kansas City Investment Management Firm Twentyth Century Investment Management changed their name to something else. I will have to give Stowers a call to find out what it was -- no matter, the firm's predominant Investment Style was, and perhaps still is Momentum investing. Which works, of course, until it doesn't work.

    KCFA, a value investor and a Growth at Reasonable Price(GARP), and, of course, always "wait for the Fat Pitch": Starbucks(SBUX) @ $8, Zycad Corporation @ 3/8 or $0.375 per share when the company had $1.25 per share of cash, no debt. What-to-do, what-to-do. Well, of course, buy 550,000 shares of Zycad at 3/8 last bid, position the shares in the firm's capital account, mark-it-up and resell shares to Hedge Fund Clients and other Value Investors like Templeton, a NYSE Specialist Firm, and Hedge Fund clients. The ramainder went into the Firm's founder's(KCFA) IRA. IRA sold the shares Fall of 1995 for $15.50 -- a 41.33 - bagger in five years. -- Not as good as many VC investments; not bad for an already public company.

    Founder retired later same year.

    Kahuna, CFA

    Investment Professional

    1974-1995

    Now a Venture Capital

    General Partner 2012 - 2019

  • Report this Comment On January 27, 2012, at 12:24 PM, newageinvestor wrote:

    Folks can we get back to the facts and not argue about nutrition. I happen to agree with one of the posts about Coke. Worldwide, soft drinks are contributing to epidemics of obesity and diabetes. Colas contain acids that cause calcium to be mobilized from bones - young women who consume too much cola and similar types of drinks have been found to be in danger of osteoporosis. And on and on. If you don't believe me go right to PubMed for peer-reviewed journals on this. There are LOTS of other companies out there so why pick something like that. For me it's not "supporting the company" though,I just don't want to profit from the health disaster. That's why I won't invest in Pepsi either, even though the company is socially-conscious in terms of its actions in the community.

    Walmart - well I hated them too until I was unemployed and broke and found that shopping there allowed me to eat fresh(kind of) produce. I have more of a problem with they way they treat their employees and for that reason won't buy the stock. Costco, on the other hand, is a fabulous company that treats its employees well, helps people save money, and does great on stock returns. The combination makes me choose COST over WM. I think it's a better investment all the way around.

    I will also never invest in an oil company or a gas company that engages in fracking.

    The lesson for me is that you can still invest with your conscience AND make a lot of money following the research on this site, and doing some of your own on some of these practices.

  • Report this Comment On January 27, 2012, at 12:34 PM, cornell22 wrote:

    Wal Mart is no more good or evil than the the small business. Do you really think the small businessman operates for anyone's benefit than his own?

  • Report this Comment On January 27, 2012, at 12:49 PM, Zederone wrote:

    Water is poison if you drink too much of it and chugging soft drinks by the liter is a relatively new phenomena. Some... No, MOST people have to go to an extreme in response to an extreme. People are funny critters aren't they?

  • Report this Comment On January 27, 2012, at 12:58 PM, JackieBelleT wrote:

    Would love to know why you chose KO over PEPSICO? I am thinking of buying some of the latter because I like its diversification into world-wide known snacks. JackieBelle

  • Report this Comment On January 27, 2012, at 1:50 PM, snakeman2 wrote:

    I don't know why everone is down on wal-mart so much,they have brought a lot of jobs to a lot of community's that needed them.they also have a lot of buys that a lot of people could not afford if they had to buy from mom&pop stores. so give wal-mart credit for being a good place to buy products at.one example name brand soup $1.43 a can at wal-mart same brand at local food world mkt $2.35 can.enough said.

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