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3 Stocks (and 1 ETF) to "Default-Proof" Your Portfolio

First off, let me say that I don't believe the United States will default on its debt.  But I also didn't believe that the government shutdown or sequestration would happen, and I was wrong both times.  Certainly, anything seems possible in today's political climate.

So if there is a default, where's a safe place for your money?

The answer: not US treasury bonds. Those are the very obligations we'd be defaulting on!  And according to a 2011 Kiplinger report, other traditionally "safe" savings vehicles are anything but default-proof.  "Even money market funds could be at risk because they're loaded with short-term Treasury and government-agency IOUs," the report concludes.

So if you can't hide your money in bonds or money market accounts, the space under your mattress may look pretty tempting. But don't worry, here are three stocks (and one ETF) with good chances of weathering a potential default.

One silver lining to plunging stock prices is that, at depressed prices, dividend yields go up--some even go way up!  And for S&P 500 companies that are considered "Dividend Aristocrats," which have increased their dividend every year for more than 25 years, even a default is unlikely to cause them to cut their dividend and make their company less appealing to investors.

One such company is Colgate-Palmolive (NYSE: CL  ) , which currently sports a 2.21% dividend of $1.36 per share, and has been increasing that dividend for 50 years.  I chose them over their fellow consumer goods Dividend Aristocrat Procter & Gamble  (NYSE: PG  ) because Colgate-Palmolive's brands' prices generally compare favorably to its competitors'. P&G's many premium brands (with their premium prices to match) like Tide and Charmin might be at risk during a recession. Colgate-Palmolive, on the other hand, weathered the Great Recession comparatively well: 

^SPX Chart

^SPX data by YCharts

Go big or go home
Speaking of consumers looking for value during a recession, nobody does value better than the nation's largest retailer, Wal-Mart (NYSE: WMT  ) . This Dividend Aristocrat sports a yield of 2.52% and trades at just 12.48 times forward earnings. Plus, Wal-Mart has shown it can weather a recession.  In 2009--the worst year of the Great Recession--Wal-Mart still increased earnings by 6%. 

Another Dividend Aristocrat that did exceptionally well during the Great Recession is McDonalds  (NYSE: MCD  ) , which declined just 20% from top to bottom (compared to the overall market's decline of 55%). Although its stock price has been on a downward trend for the last several months, the "premium" (but still cheap) menu items at McDonald's like Mighty Wings and McWraps may seem pretty appealing to cash-strapped families. Plus, it sports a 3.42% dividend yield.  

^SPX Chart

^SPX data by YCharts

One big advantage to both of these companies is that they're, well, big.  Because they aren't growing quickly, they are unlikely to need to take on a lot of debt. If the US defaults, interest rates are almost certain to rise, meaning that in a default scenario, bigger may very well be better.

There's gold in them thar defaults
For those concerned that even large corporations won't recover, you may want to look at that classic "safe" investment, gold. The price of gold has been dropping steadily for the past year, down from more than $1,700 per ounce a year ago to under $1,300 per ounce today. Look for that price to jump, though, if the US defaults, as nervous investors flee to the one remaining "safe" haven, as they did in the Great Recession:

^SPX Chart

^SPX data by YCharts

If you want to invest in gold without actually purchasing a chunk of the shiny stuff, the SPDR Gold Trust ETF (NYSEMKT: GLD  ) is about the easiest way to do it.  Remember, though, that if a default happens, the prices of these shares could start to move quickly, so consider using a limit order if you decide to buy. Also, remember that the stock market has historically outperformed gold, so avoid the temptation to put all of your eggs into this one (golden) basket.  

The bottom line
According to Kiplinger, the bottom line during a default situation is "Diversify. And keep some powder dry." Remember that a default is likely to affect all investments--large stocks, foreign stocks, even commodities and bonds--in ways we can't anticipate.  Always keep some cash on hand in case you need it, and never put all your money into a single stock...even a "default-proof" one.

The U.S. government has piled on more than $10 trillion of new debt since 2000. Annual deficits topped $1 trillion after the financial crisis. Millions of Americans have asked: What the heck is going on?
The Motley Fool's new free report, "Everything You Need to Know About the National Debt," walks you through with step-by-step explanations about how the government spends your money, where it gets tax revenue from, the future of spending, and what a $16 trillion debt means for our future. Click here to read the full report!

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Related Tickers

9/23/2016 4:01 PM
CL $73.25 Down -0.28 -0.38%
Colgate-Palmolive CAPS Rating: ****
GLD $127.65 Up +0.08 +0.06%
SPDR Gold Trust CAPS Rating: **
MCD $117.17 Down -0.19 -0.16%
McDonald's CAPS Rating: ***
PG $87.76 Down -1.23 -1.38%
Procter and Gamble CAPS Rating: ****
WMT $72.35 Up +0.08 +0.11%
Wal-Mart Stores CAPS Rating: ***