Even after a six year bull run, the broader markets don't appear to be showing any signs of slowing down. Even so, income-seeking investors who have been riding this market to new all-time highs may want to start to rotate into a handful of defensive stocks that can withstand any unexpected downturns moving forward.
With this theme in mind, we asked three of our Motley Fool investors which stocks they think can act as both strong income generators and defensive plays right now. They suggested Pfizer (NYSE:PFE), Proctor & Gamble (NYSE:PG), and AT&T (NYSE:T). Read on to find out more.
The power of cash
George Budwell (Pfizer): Stocks that can withstand market lulls tend to be tied to companies with exceptional free cash flows and above-average cash positions. The pharma giant Pfizer has both of these traits in spades.
Despite experiencing an avalanche of patent expirations for top products like Lipitor over the past seven years, Pfizer was still able to generate over $15 billion in free cash flows in the past 12 months, thanks to its growing anti-inflammatory, oncology, and cardiovascular-care franchises. The drugmaker also sports a cash position in excess of $14 billion -- even though it doled out over $35 billion to acquire Anacor Pharmaceuticals, Hospira, and Medivation in just the past two years.
Pfizer's unique ability to generate cash has allowed it to plow a whopping $56 billion into share buybacks and another $50 billion into dividends since 2010. While this company hasn't been able to produce particularly enticing levels of top-line growth lately, Pfizer's shares have still marched higher at a respectable clip because of its top-notch shareholder-rewards program.
In a nutshell, Pfizer's stock has performed admirably during, perhaps, its worst stretch of time in terms of losing key products to the so-called patent cliff -- up 150% on a total return basis since 2010. And now that the company is passing through the eye of the needle, so to speak, from a patent-expiration standpoint, and its immense pipeline is on track to produce a number of new blockbuster products, this titan of the pharma industry appears capable of shrugging off even a marked decline in the broader markets. Perhaps best of all, though, Pfizer offers a dividend yield of 3.61% that's close to the top of its big pharma peer group.
A sturdy consumer-staples giant
Keith Noonan (Procter & Gamble): Investing in consumer-staples companies that are backed by strong brands is a great way to insulate your portfolio against a market crash. While high-flying, growth-dependent tech companies and businesses that deal in luxury goods can see their prospects worsen dramatically when the market turns bear, consumption of essential products is unlikely to be greatly affected by the tightened purse strings that typically accompany a market crash.
In the consumer-staples space, few companies have a sturdier assortment of products than Procter & Gamble. The company has more than 20 brands that do more than $1 billion in annual retail sales. Plus, consumer attachment to and confidence in products like Crest toothpaste, Tide detergent, and Bounty paper towels make it likely that P&G will be able to maintain pricing power, even if broader economic conditions weaken.
The stock is also historically less volatile than the broader market and has a great returned-income profile. P&G currently packs a solid 3% yield, and it's also got a history of delivering regular dividend growth that's tough to beat: For 61 consecutive years, the company has delivered annual payout increases. Considering that this time span has included eight U.S. recessions and the company's current payout ratio sits at roughly 66%, it's a safe bet that its dividend legacy will continue to improve with time.
This telecom giant is a safe bet
Sean O'Reilly (AT&T): Try as we might, it's not easy to find a stock that can ride out a market crash, such as the 2008 financial crisis, with a minimum of loss. The blunt truth is that stocks offer higher returns because they're volatile and unpredictable -- but yes, occasionally crash. However, there's one stock that performed admirably during the dark days of 2008-2009 -- none other than "Ma Bell" AT&T.
The largest telecom provider in the U.S., AT&T has seen its fair share of market crashes -- which is probably why it fell by just 30% during the 2008 financial crisis. That may seem like a lot, but it wasn't long before shares rebounded from their lows, and it was far better than the S&P 500's 60%+ loss.
Today, AT&T is in the midst of becoming a 21st-century media conglomerate, one with interests in cable, cellphones, and a host of other properties. While time consuming, the transformation should cement the company's juicy 5.4% dividend yield.
Could shares suffer in a market crash? Absolutely, but so will every other stock. But with a dividend that beats U.S. government bonds, and shares that performed admirably during the latest financial crisis, AT&T may be a top stock to own during the next one.
George Budwell owns shares of Pfizer. Keith Noonan has no position in any of the stocks mentioned. Sean O'Reilly has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.