3 Stocks to Own in a Bear Market

The stock market is now sitting very close to all-time highs, and that means cheap stocks are hard to find. Even the large caps in the Dow Jones Industrial Average look pricey, with price-to-earnings ratios for many of its components at 20 or higher. It's understandable for investors sitting on the sidelines to be uncomfortable to put money to work right now with valuations at these lofty levels, especially if the market is ready to take a dive from its all-time highs.

But even now there are stocks that can be bought and provide protection if the market goes down next year. Fast-food giant McDonald's Corp. (MCD 0.37%), retailing king Wal-Mart Stores (WMT 0.46%), and consumer products giant Procter & Gamble (PG 0.54%) are three stocks that will likely fare much better than most if the broader market turns south.

Multiple margins of safety
These three stocks offer qualities that should be highly sought after by value investors in the event the markets go down in 2015. Namely, they have higher-than-average dividend yields, low volatility, and valuation multiples that aren't sky-high. This provides valuable margins of safety in times of shaky markets. This was the case during the last major bear market in 2008. McDonald's, Wal-Mart, and P&G performed much better than the market as a whole. In fact, McDonald's and Wal-Mart were the only two stocks in the Dow Jones Industrial Average to go up in 2008.

Take a look at some of the metrics indicating this trio of large caps can offer significant downside protection.

Data source: Yahoo! Finance.

As far as their valuations are concerned, these stocks aren't screaming bargains. Their forward-looking multiples are at or near similar multiples for the S&P 500. That means if the market took a significant nosedive, it's likely these three stocks would go down somewhat as well. But the risk for these three specific stocks is mitigated by their defensive nature, as evidenced by their extremely low volatility and above-average dividend yields.

Beta analyzes a stock's volatility in relation to the broader market. A stock with a beta of 1.0 is perfectly correlated with the overall market, so that a 1% rise or fall in the market would be matched by a 1% rise or fall in its stock price. McDonald's, Wal-Mart, and P&G each have beta values below 1.0, which means their stock prices should decline less than the overall market.

In addition, their dividend yields are above average, and getting those quarterly checks can help offset any declines in stock price. The S&P 500 Index now yields 1.8%, as the dividend yield has been pushed down by the continued gains for the stock market. By comparison, these three stocks offer 22%-94% more income than the broader market.

Plus, it's important to remember that their dividends are well-protected by sufficient profits. McDonald's, Wal-Mart, and P&G have earnings payout ratios of 66%, 39%, and 70%, respectively, which means their dividends aren't in danger of being cut. Far from it. In fact, these three are great dividend stocks with long track records of raising their payouts ever year. McDonald's has increased its dividend every year since its first dividend payment in 1976. Meanwhile, Wal-Mart has raised its dividend for 41 years in a row, and P&G stands out with an amazing 58 years of consecutive dividend increases.

These stocks can be a safe haven in a bear market
With the stock markets racing to new all-time highs, it's a less-than-optimal time to put money to work in the market. For investors nervous about buying high right before the markets potentially take a dip, a possible solution could be buying McDonald's, Wal-Mart, and P&G. These three stocks will certainly participate if the market continues to rally, thanks to their earnings growth, and their high dividend yields will be a nice bonus. And if the market falls, it's likely McDonald's, Wal-Mart, and P&G will fare better than most stocks because of their extremely low volatility.