With the markets in turmoil once again, and seven straight days seeing over 100 point moves in the Dow Jones Industrial Average, you may be worried that another crisis is going to take the wind out of the markets. Well, it could very easily happen – Europe, Greece, US Debt, all are playing deeply on the minds of investors and are weighing on the economy. Should things go South, where are the best sectors to invest?
I love utilities. It is one of the only industries that are allowed to maintain local monopolies! Utilities are great defensive stocks because even in the worst times, people still need electricity, phone service, and many won’t give up their internet!
When looking at these companies, really look at electricity providers first, then telecommunications companies. Electricity companies will always have demand for their products, where as telecommunications companies have a little more elastic demand. With both types, however, look at companies that pay a nice dividend and have done so for a long time (including during the last financial crisis in 2007-2008). These companies will be the ones best suited to continue to earn money and pay out dividends in future crises.
Energy, like electricity, will always be in demand. In fact, many of these companies supply the energy used to make electricity. The great thing about energy is that its products – oil and natural gas – are always going to have demand in multiple products. Electric generations, fuel, and plastics are some of the main areas these products are used, and they will have a strong demand even in a downturn. Furthermore, fossil fuels are becoming increasingly rare as they are finite resources.
When looking at energy companies, look at ones that are fully integrated – meaning they drill, transport, refine, and sell their own products. These companies are the ones that will be the strongest should another downturn occur. Examples of these include Exxon Mobile, Shell, and Chevron. If you look at just energy explorers, or refiners, you could see these companies fail in a downturn because of credit freezing or pricing pressure. Furthermore, the large energy companies also pay great dividends, and would be a great addition to a dividend investment strategy.
Just like it sounds, consumer staples are companies that provide products that consumers need no matter what – household products like cleaning supplies, food makers, prescription drug companies, and even tobacco. These companies do relatively well in tough economic times because consumers NEED these products in their daily lives. They need to wash clothes and clean, they need food, they need medicine, and/or are addicted to the product. As a result, these companies suffer little, except maybe consumers switching to generic or store brands (which many of these companies make as well).
When looking at consumers staples, look at companies that have a large assortment of products in different sectors of consumer goods – P&G is a good example. They make all types of household and food related products. In healthcare, Abbott Laboratories is a good example because it makes drugs, medical devices, and nutritional supplements. By having multiple product lines, the diversification allows for safer revenue streams. Also, these companies tend to pay nice sustainable dividends, which is great for investors.
Readers, what other defensive stock sectors do you recommend or have thought about?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
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