Market downturns often go hand in hand with a decline in the economy. During a downturn, investors, especially those focused on capital preservation and income, generally turn their attention to defensive stocks in an attempt to weather the market volatility that results.
As the market cycle progresses and the economy finally bottoms, early-stage cyclical stocks such as homebuilders will be prime candidates for investment. Until then, defensives are a great place for conservative investors to wait for the storm to clear.
Here are three good stock options for conservative investors to consider after a market downturn is in full swing.
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1. Bank of New York Mellon
Bank of New York Mellon (BK 0.78%) is an unusual type of bank called a trust bank. While most commercial banks are in the business of taking deposits and making loans, trust banks largely perform services for a fee. During a downturn and a recession, most banks will see an uptick in credit losses. Trust banks aren't immune to credit losses, but they have a lot less credit risk than the typical commercial bank.
NYSE: BK
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Bank of New York Mellon's main business is investment services. This business involves managing the nuts and bolts of administration for mutual funds and exchange-traded funds. The company will hold the securities, manage the cash, remit payments to investors, handle fund accounting, and perform other services. For this, the company is paid a fee.
Since Bank of New York is not lending its own money for this business, it bears little credit risk. Bank of New York Mellon also owns Pershing, which is a clearing firm for fixed income trading. Fee income is a lot more stable than interest income, especially in a downturn. This makes Bank of New York a pretty defensive financial, as far as financials go.
2. Duke Energy
Duke Energy (DUK +1.01%) is a classic defensive stock. The company is a regulated utility that provides gas and electric service to the Southeast and parts of the Midwest. Regulated utilities are generally insensitive to the economy as consumers need heat and electricity regardless of the state of the economy. As a regulated utility, the company is granted a local monopoly in exchange for government oversight on pricing. This is meant to ensure that the utility doesn't price gouge.
NYSE: DUK
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In practice, regulated utilities face a regular negotiation (called a "rate case") where the regulators advocate for consumers and push the company to lower prices and/or make investments in renewables. While the regulators try to get the best deal for consumers, they know if they drive too hard of a bargain, the utility might skimp on maintenance or things like tree trimming, which can result in outages and surly voters. Ultimately, the utility ends up being able to make a comfortable return.
Regulated utilities are not exciting stocks by any stretch of the imagination; however, they are ultra-safe and are often suitable for income investors and retirees. They also pay reasonably decent dividends. Duke Energy has a dividend yield of 3.7%.
3. Proctor & Gamble
Proctor & Gamble (PG +0.10%) is the classic defensive stock. The company is in the business of manufacturing consumer products, the kind generally found in a supermarket. When the economy stumbles, consumers will cut back on going to dining establishments and/or spending on apparel and non-essential services. But they will still buy laundry detergent, paper products, and beauty products. Proctor & Gamble's portfolio of brands includes such iconic and popular products as Tide detergent, Downy fabric softener, Gillette razors and blades, Crest toothpaste, Pampers diapers, Bounty paper towels, and Charmin bath tissue.
NYSE: PG
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As a mature company, Proctor & Gamble isn't going to provide much in the way of growth above and beyond the growth of the general economy. The company is another one of these stocks that is a good choice for income investors given its conservative business model and defensive characteristics. It also provides a decent dividend yield of 2.6%.
