Defend Yourself From the Double Dip With These 5 Stocks

Right now, thousands of people are packing up their cars, filling up their gas tanks, and hitting the road for vacation. And the topic they'll surely discuss on those long car rides is ... the economy!

Well, maybe not, but people are growing worried. Using Google search trends, you can look into the collective searches of millions of people around the U.S.

The number of searches for "double dip" has more than doubled since May! Now, searches aren't necessarily predictive of the future, otherwise Google would be the world's greatest investor, and they certainly are not.

I'm not sounding the alarm bells of panic simply to sound the alarm bells of panic. With the market down about 8% over the past three months and concerns over Europe's debt crisis, China's slowing economy, and the BP spill still in the forefront of news, investors have every right to be concerned. Instead, today's economic climate should be a reminder that you should always keep your portfolio prepared to weather tough times.

People are worried that some of the largest stocks in the U.S. are priced as though a double-dip recession is imminent. Of the largest 25 stocks in the S&P 500, 15 are priced at or less than 13 times expected 2010 earnings (cheap!) and they all pay a dividend. These companies have the characteristics of defensive stocks.

Defensive stocks
There are two core qualities of defensive stocks:

1. Reliable. These companies make the products that people buy even when their wallets are being pinched. In other words, shampoo, razors, medicines, or electricity for their homes -- and not speedboats.
2. Dividends. Dividends mean you get a steady return from a stock regardless of what the market is doing. So, all else being equal, you enjoy a head start over the stocks that don't pay dividends.

Also, when you're looking for reliable companies that pay dividends, you want to make sure your company has paid its dividend steadily over a period of at least five years. Only then are you getting a track record you can trust.

Of course, there's one more core quality you should always look for.

1. Cheap. You should always be constantly vigilant of paying too high a price. As many in the U.S. housing market know, there is such a thing as too high a price. Demand a margin of safety from your stocks buys, and you will be rewarded.

So, with those as guidelines, here are five cheap, reliable, defensive stocks that shouldn't let you down even when times get tough:

Merck, J&J, and the health-care sector in general have been beaten down by worries about unintended consequences of health-care reform and the Patient Protection and Affordable Care Act. With 2010 P/E of 10.3 and 12.2, respectively, the downside is more than factored into these stocks' prices. Merck reports earnings on Friday and is expected to post a $0.83 of earnings; anything higher will further bring down its already-low P/E. Industry bellwether GlaxoSmithKline (NYSE: GSK) reported poor earnings last week, but investors should not worry; this was due to a large legal settlement during the quarter.

AT&T shares have gone nowhere since Apple's (Nasdaq: AAPL) iPad and iPhone 4 hit the market. Hewlett-Packard was once rumored to be building a tablet to compete with the iPad using Google's Android platform, but those plans are now on hold. 

AT&T and Hewlett-Packard are undoubtedly cheap, but some impressive investors, including Bill Miller, believe IBM is the most remarkably mispriced name in the market. Over the past five years, IBM has doubled its earnings per share, increased its dividend by more than 20% a year, and trades for only 11 times earnings! 

All three of these companies are strong enough to be a part of your portfolio, but I'd take a special look at IBM.

Is this a good time to hop on the large-cap bandwagon, or do other companies catch your eye? Let us know in the comments box below!