The S&P 500 has already made more 1%-plus daily moves this year than it did in all of 2017, and investors are getting nervous. I’m hearing from a lot of investors who want to know how to dampen these big swings’ impact on their portfolios, or who want to move some of their money into safer investments.
Luckily, plenty of stocks and other investments are still resisting or even moving counter to the markets’ swings, and adding some of these to your portfolio can make checking your performance feel less like being on a rollercoaster and more like driving across Kansas.
Here are my 3 best safe investments for these uncertain times.
Best Safe Investment #1: Preferred Stocks
Preferred stocks are a great way to add regular income and counter-cyclicality to your portfolio. We have a preferred ETF as a core holding in the Safe Income tier of my Cabot Dividend Investor portfolio, and it has consistently returned about 6% per year since we bought it, with a minimum of volatility. However, not all investors know exactly what a preferred ETF is, or why they might want to own one.
For example, one subscriber recently asked me:
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“I’ve started accumulating PGX per your recommendation in the face of all this volatility, but the more I read about it the less certain I am of just what PGX is. Thus, I’d appreciate more explanation of what this ETF consists of.”
In short, PGX is the PowerShares Preferred ETF, and it’s an exchange-traded fund that holds preferred shares. That means it buys and holds preferred stock issued by all sorts of companies, although the most common issuers are financial companies.
Preferred stock is similar to a bond but it’s neither a bond nor common stock. It’s a different kind of debt that some companies choose to issue.
Preferred shares represent debt, like a bond or loan. They do not represent or confer ownership, and so the shares won’t appreciate in value like equity. (They’re usually issued at a par value of $25 and trade between $24 and $26. If you buy preferred shares at a discount to par — below $25 — you may see some capital appreciation, but it’s pretty limited.)
Also, the distributions are fixed, like interest on a bond. So you’d only buy a preferred or a preferred ETF like PGX for steady income, not dividend growth.
So owning PGX is more like owning a bond fund than a financial sector ETF. However, PGX is less sensitive to interest rate changes than a bond fund, which is why I like it and have it in the Safe Income Tier.
Best Safe Investment #2: Consumer Staples
Based on several measures of volatility, financial and energy stocks have been by far the most volatile sectors over the past year. The least volatile sectors? Consumer staples and consumer discretionary stocks.
Although volatility in consumer discretionary names has picked up recently, the consumer staples sector is still a great place to find stocks that don’t jump around too much.
Consumer staples are things like groceries, personal care products and household items that people tend to buy regardless of economic conditions. The sector includes many high quality blue chip stocks, like Procter & Gamble (PG) and Colgate Palmolive (CL).
Many consumer staples stocks have been outperforming the market so far this year, while also delivering lower volatility. For example, Estée Lauder (EL), whose beauty brands include Clinique, MAC Cosmetics, Aveda and more, is up 16% YTD compared to the S&P’s 2% gain. During the market’s February correction, when the S&P pulled back 10%, EL declined half as much.
A more traditional play on the consumer staples sector would be a food company like Calavo Growers (CVGW), which fell less than 4% during the same February market correction. The company packages and distributes avocados and other fruits, and the stock is up 12% since the start of the year. Or look at Flowers Foods (FLO), maker of Wonder Bread and other packaged bakery goods, which is up 16% YTD and advanced 4% during the February correction.
Best Safe Investment #3: Utilities
Finally, although they were underperformers for most of 2017, utilities have been less volatile than most other sectors since the start of the year, regaining their reputation for reliability.
Like consumer staples companies, utilities have very reliable revenues because demand for water and power doesn’t change much even when the economy slows down or the stock market throws a tantrum.
Last week, the three S&P 500 stocks with the lowest beta, a measure of volatility, were all utilities.
The least volatile of these low beta stocks, Consolidated Edison (ED), has been in my Cabot Dividend Investor portfolio since I started the advisory four years ago. Since then, we’ve seen a total return of 51%. The stock is a great counter-cyclical holding, often going up when the broad market goes down. Plus, it pays quarterly dividends of 72 cents per share, for an annual yield of 3.8%. That makes the stock easier to hold on to—and more rewarding—even when the market gets jumpy.
Chloe Lutts Jensen developed Cabot's proprietary Individualized Retirement Income System (IRIS) and Cabot Dividend Investor to provide both high income and peace of mind. If you’re retired or thinking about retirement, her advisory is designed for you.