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Nicholas Kitonyi
Nicholas Kitonyi
Articles (296)  | Author's Website |

Is It Time to Hunt for Defensive Dividend Stocks?

The Fed's latest statement on rate hikes sent the 10-year bond yield tumbling, making some analysts speculate that there is a potential financial crisis incoming

March 25, 2019 | About:

The US 10-Year Bond Yield dipped below the three-month yield on Monday, triggering what analysts call an inverted yield curve in the three-month to 10-year spread. Economists argue that, statistically, this scenario has predicted the last seven recessions. This has sent some serious shockwaves through the market, pushing all the major indices to drop points as uncertainty continues to grow.

The sharp decline in the 10-year Treasury yield was triggered by the Federal Reserve’s announcement that there will be no rate hikes in 2019. Ideally, this could mean that the state of the U.S. economy does not allow it, or perhaps the Federal Reserve is just being cautious given the global economic uncertainties that have dragged on for the better part of the last two years.

Brexit is one of the geopolitical stalemates that could lead to a major economic slowdown in the EU and the U.K., with Prime Minister Theresa May now facing calls for resignation. And on Friday, the German 10-year bond yield dropped below zero, which signals a serious case of economic slowdown. On the other hand, China’s scheduled trade talks with the U.S. are yet to take place after they were pushed to April, which puts the Chinese economy at risk of a continued slowdown.

With these collective factors pointing towards a potential global recession, risk assets are likely to take a dive, resulting in significant capital losses to investors. This makes stock investing trickier, which means that perhaps investors should look to re-evaluate their investment strategies. As such, diversifying one's portfolios to include defensive stocks that pay dividends could be the key to weathering the storm should a recession hit the market.

So, is it time to hunt for dividend kings that operate in industries that can be classified as defensive -- industries that despite the economic situation are unlikely to experience a major dip in revenues and profits?

With the alarm bells ringing, it does seem that now could be the time to seriously think about defensive dividend stocks. The reward to be gained from defensive stocks from the perspective of capital gains may not be much, but if they do pay a healthy dividend, then they might be worth a look. In addition, there are several benefits that come with dividend investing. A tax attorney will say that chief among them is the rate of tax on dividends compared to capital gains from the sale of stocks and other capital assets.

Here are some of the defensive stocks that are standing out as good dividend stocks.

The utilities sector is the best place to hunt for such stocks. And among the few that stand out is Duke Energy Corp. (NYSE:DUK), which at the heart of the global financial crises from 2008 to 2009 managed to maintain a relatively stable stream of revenues and income. The company also continued to pay dividends, with its dividend yield spiking in 2009 due to a drop in stock price. As such, while a decline in stock price resulted in a negative impact on capital gains, the company maintained relatively healthy top and bottom lines, which allowed it to continue paying dividends.

The other one that stands out is National Grid PLC (NYSE:NGG). This U.K.-based gas utilities company trades at incredible valuation multiples, with a price-earnings ratio of just 8.89x, which trumps the industry average. Its current dividend yield of 5.36% is also very lucrative and when looking back to the previous global financial crises, this company’s revenue and income maintained relatively good performance with a positive bottom line. Meanwhile, dividend payments resulted in a dividend yield of nearly 8% in 2009 amid a drop in stock price.

Most defensive stocks never deliver wild stock gains. But Southern Co. (NYSE:SO) has been one of the best-performing electrical utility stocks in the U.S. in 2019. The company’s stock price is up 18.6% since the start of the year, with the rally beginning in the final week of 2018. It has a dividend yield of 4.6% and, having weathered the storm in 2008 to 2009 global financial crises without a major hit on revenues and income, this Atlanta, Georgia-based company could be worth a look for those looking to diversify their portfolio in anticipation of a potential marketwide crash in stock prices.

Other notable utility stocks that have incredible dividend yields of at least 4% that could do well in the event of a major downturn include Richmond, Virginia-based Dominion Energy Inc. (NYSE:D), which also demonstrated relative stability in the previous financial crises with a dividend yield spiking to nearly 5.5% back then.

PPL Corp. (NYSE:PPL) is also another alternative, which currently boasts a dividend yield of well over 5% in addition to a market-beating price-earnings ratio of 12.48%, which it has achieved despite the stock’s 2019 rally of 14.3%.

In summary, with government Treasury yields, the Federal Reserve's comments, the Brexit stalemate and the current impasse in the U.S.-China trade talks sending negative signals about the outlook of the global economy, it might be a good thing to re-evaluate investment portfolios and try to add into the mix some defensive dividend stocks.

Disclosure: I have no positions in the stocks mentioned.

About the author:

Nicholas Kitonyi
Nicholas is the founder of CAGR Value. He is a financial analyst with extensive experience in investment research and stock market analysis. His analysis has been featured on several research sites.

Nicholas has solid knowledge of both U.S. and European markets. His investment style is focused on undervalued plays and growth stocks. Nicholas classifies himself as a swing trader and likes to trade GBP/USD, gold and FTSE 100, among other liquid instruments.

Visit Nicholas Kitonyi's Website


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