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The market was doing pretty well until Europe reared its ugly recession-plagued head yet again. It seems so many stock analyses come with a warning that "economic woes" could unravel your hard-won gains. What's an investor to do? Should we all watch anxiously for the latest Spanish GDP figures or Chinese electricity consumption rates, and base our investing decisions on the size of each new central bank easing effort? Or is there a way to feel secure in our choices without requiring constant macro updates?
Last year, I offered five low-beta stocks that I thought might outperform a wobbly market. Over the past year, they've gained an average of 15.5%, which isn't bad, but unfortunately it isn't market-beating either, as the S&P 500's total return in the same period has been 26.2%.
However, in my defense, these low-beta stocks were selections for wobbly times, not for the rising tide that's lifted the market over the past 12 months. All five of my original selections handily outperformed the index during the worst part of the global economic meltdown, gaining 25.3% from 2007 to 2010 as the S&P shrank by 15.9%. If you believe that the months to come will look more like 2008 than 2012, then I have five fresh new picks for you.
Five stocks for smart defense
Each of these five stocks has a beta that marks it as less volatile than the broader market. If a stock's beta is 1, its returns should track the S&P 500. If a stock's beta is lower than 1, it could rise at a slower rate than the rest of the index, but it should also decline at a slower rate. That can be frustrating when times are great, but in a falling market it can be quite helpful to hold stocks that are known to resist the movements of the indexes.
|Teva Pharmaceuticals (NYSE: TEVA )||11.5||2.1%||0.71||18.4%|
|Enterprise Products Partners (NYSE: EPD )||19.4||4.7%||0.68||37.4%|
|American Water Works (NYSE: AWK )||18.5||2.7%||0.30||25.8%|
|American Capital Agency (Nasdaq: AGNC )||9.7||14.3%||0.23||42.9%|
|Philip Morris (NYSE: PM )||18.0||3.7%||0.89||43.4%|
Sources: Yahoo! Finance and YCharts.
What makes these companies resistant to turbulence?
Teva sits at the intersection of generic-drug dominance and growing brand-name relevance. Most big pharma companies face dangerous patent cliffs for their biggest blockbusters, but that's music (and money) to Teva's ears. It's sure to aggressively push cheaper generic versions of many multibillion-dollar prescription drugs in the next few years, adding to a very diverse portfolio.
Enterprise Products Partners operates thousands of miles of oil and gas pipelines, as well as various plants and import/export terminals. It's a master limited partnership that pays out nearly all its profits to shareholders, but it's managed to invest heavily in infrastructure as well. My fellow Fool Aimee Duffy notes that Enterprise has more than $7.5 billion in projects under construction, none of which faces legal opposition -- a rarity in this politically unpopular but economically necessary industry.
What could be more stable than water? You're not going to stop using water if you lose your job, and it's simply too important to too many industries to expect water utilities to suffer in a downturn. American Water Works is perhaps the best bet in this sector. Fool Sean Williams notes the company's many advantages, including scale and pricing power, a water-guzzling group of natural-gas-drilling customers, and a consistently increasing dividend that's paired with a highly reasonable valuation.
American Capital Agency, like Enterprise, is another company governed by special tax rules that mandate it pay out virtually all its profits in dividends -- and as you can see from the previous table, American Capital has some hefty dividends. As a mortgage REIT, or real estate investment trust, American Capital's business is highly dependent on the Federal Reserve's actions, which can have major effects on the mortgage-backed securities that it relies on for income. Its payouts may dip as interest rate spreads tighten thanks to Ben Bernanke's latest buying spree, but American Capital has already survived and thrived during two previous easings and has the experience to make QE3 a success on its own bottom line.
It's tough to argue against an internationally recognized brand that has its customers hooked. I've previously called Philip Morris a stock for the rest of your life, and it continues to earn the approval of defensively minded shareholders despite antismoking trends and potentially unfavorable currency-exchange fluctuations. Philip Morris also has the lowest and most sustainable dividend payout ratio in the tobacco sector.
Only Teva has failed to drastically outperform the S&P 500 over the past five years, and much of that has been the result of a long drop in its P/E ratio that now makes it one of the cheapest of the bunch. All five are trading at reasonable valuations today, with nearly all at the lower end of their five-year P/E average. If these five stable, defensive dividend dynamos aren't enough for you, how about nine more? You can read all about the nine rock-solid dividend stocks handpicked by Fool analysts when you claim a copy of our most popular free report. Click here to get it now, at no cost.