The Great Rotation Into Defensive High-Yield Stocks

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

LONDON -- It's been called the Great Rotation, the switching of investors' appetite from government bonds into equities.

Investors have been losing faith in the safety of bonds, as quantitative easing has pushed interest rates to unprecedented lows and stoked fears of future inflation. At the same time, the newly minted money has found a home in equities, especially since Mario Draghi reduced tail risk by saying the European Central Bank would do whatever it took to save the euro.

A significant feature is the preference of investors for shares in defensive sectors that are paying decent yields. They enable shareholders to enjoy the income and relative safety associated with bonds in more normal times.

That's chased the price of such stocks to exceptional highs. Fortunately, the growth opportunities for defensive sectors in emerging markets mean investors don't need to be unduly concerned about valuations.

Diageo  (LSE: DGE  ) (NYSE: DEO  ) is a perfect example. Its shares are trading on a trailing price-to-earnings (P/E) ratio of 27, nearly double the FTSE 100 average P/E. According to my data, which shows the historic year-end P/Es, the shares are as highly rated as they ever have been this century.

Applying its global distribution to new emerging markets has powered much of Diageo's growth. Yielding 2.2% and with a prospective P/E a more palatable 20 times, a recent fall of 6% from last month's all-time high might present an opportunity to pick up this stock.

There has been a more modest pull-back of just 2% in Unilever's (LSE: ULVR  ) (NYSE: UL  ) all-time high after the company revealed sluggish growth in Europe this month. Its trailing P/E is 23, above the range it has traded in for the last 10 years, also dropped to 20 on prospective earnings. With strong global brands that have a defensive nature in developed markets and appeal to emerging market consumers, its stock also has bond-like qualities.

That's a market characteristic shared in spades by British American Tobacco  (LSE: BATS  ) . Western consumers are stuck on the product, and emerging market populations are acquiring a taste for global brands. Its shares are just a tad off their all-time high and at the top end of their historic rating, though a trailing P/E of 17 is nearer the market average.

A prospective yield of 4.2% makes BATS an appealing income stock.

A core of safe, income-generating stocks makes sense in any portfolio, even if they are expensive. That's why The Motley Fool has produced a new report: "5 Shares to Retire On." It details five companies that have dominant market positions, healthy balance sheets, and robust cash flows, qualities that underpin their reliability and future dividends. Whether you're saving for retirement or for any other purpose, I recommend you have a look at these five shares. You can download the report by clicking here -- it's free.


Read/Post Comments (0) | Recommend This Article (2)

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2398848, ~/Articles/ArticleHandler.aspx, 10/28/2016 4:24:02 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 7 hours ago Sponsored by:
DOW 18,169.68 -29.65 -0.16%
S&P 500 2,133.04 -6.39 -0.30%
NASD 5,215.97 -34.29 -0.65%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/28/2016 4:08 AM
BATS $4652.50 Up +41.50 +0.90%
British American T… CAPS Rating: No stars
DEO $107.30 Down -0.75 -0.69%
Diageo CAPS Rating: *****
DGE $2166.50 Down -22.50 -1.03%
Diageo CAPS Rating: No stars
UL $41.75 Down -0.02 -0.05%
Unilever CAPS Rating: *****
ULVR $3411.00 Down -27.50 -0.80%
Unilever CAPS Rating: No stars