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6 Defensive Stocks to Combat Rate Spike Fears

Zacks

After an extended period of aggressive investing, market watchers are veering around to taking a more defensive approach toward stock picking. The recent spike in yields and the accompanying rise in volatility is the primary trigger for the change in stance. Investors are expressing concerns over valuations and looking to invest in government bonds, which are safer than their equity counterparts.

For equity-centric investors, it makes sense to invest in defensive stocks to protect hard-earned profits. These stocks offer slower but stable growth during periods of uncertainty. Since these also hold the promise of higher-than-average yields, investing in defensive stocks looks like a prudent option at this point.

Bullish Data Boosts Rates to Record Levels

On Oct 3, yields on benchmark Treasury Notes scaled record levels following the release of a series of strong economic reports. The ISM services index hit an all-time high in August. Factory orders posted their largest monthly increase since September 2017. Also, ADP data reflected strong private sector job additions in September.


This trend continued on Oct 5 with the release of impressive jobs data. Consequently, the yield on the 10-year Treasury note increased by 3 basis points to 3.227%, its highest level since May 2011. (Read: Jobs Data Sends Treasury Yields to New Highs: 5 Bank Picks)

This resulted in a weekly increase of 17.1 basis points, the highest such increase since February. Fears over rising yields spilled over into trading on Oct 8, leading to a three-day run of losses for the broader markets.

Why Are Investors Turning to Defensive Options?

The pickup in wage growth will likely cause the Fed to hike rates further in order to combat inflationary pressures. On Oct 3, Fed Chair Jerome Powell stated that there’s still a long way to go for rates to hit neutral, a clear indication of further rate hikes. This will raise the cost of funds for both corporations and investors.

Investors are increasingly of the opinion that they would be better off investing in risk-free government securities. This has also led to fresh concerns over the valuation of investments, which have benefited from a sluggish rate environment. A perfect storm may be in the works for stocks and will bring with it a spike in volatility.

Defensive options are becoming increasingly popular in such an environment. On Oct 8, the Consumer Staples Select Sector SPDR (XLP) gained 1.4%. The Utilities Select Sector SPDR (XLU) and the Real Estate Select Sector SPDR (XLRE) increased 1.7% and 0.4% on Oct 5, emerging as the only two sectors to finish in the green. The XLU was the best sector performer last week, gaining 2% over the period.

Our Choices

The rise in yields has been primarily caused by a series of bullish economic reports. However, investors have chosen to focus on a rise in cost of funds, leading to a spike in volatility and losses for equity markets. With the Fed intent on hiking rates further, such fears are unlikely to die down in a hurry.

Investing in defensive stocks, which offer a safe and stable choice during periods of uncertainty, looks like a good option at this point. Further, they carry the promise of above-average dividend yields. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.

Ready Capital Corporation RC a commercial mortgage real estate investment trust (REIT), is a real estate finance company that acquires, originates, manages and finances commercial real estate loans and real estate-related securities.

Ready Capital has expected earnings growth of 24% for the current year. The Zacks Consensus Estimate for the current year has improved 0.6% over the last 30 days. The stock has a dividend yield of 10%. It sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

EPR Properties EPR is a specialty REIT that invests in three primary segments: Entertainment, Recreation and Education.

EPR Properties has a Zacks Rank #2 (Buy). The company has expected earnings growth of 20.2% for the current year. The Zacks Consensus Estimate for the current year has improved 0.2% over the last 30 days. The stock has a dividend yield of 6.4%.

Dominion Energy, Inc. D is a major energy company engaged in regulated and non-regulated electricity distribution, generation and transmission businesses.

Dominion Energy has a Zacks Rank #2. The company’s expected earnings growth for the current year is 14.8%.The Zacks Consensus Estimate for the current year has improved 0.3% over the last 30 days. The stock has a dividend yield of 4.7%.

Xcel Energy Inc. XEL is a holding company, with subsidiaries engaged primarily in the utility business.

Xcel Energy has a Zacks Rank #2. The company has expected earnings growth of 7.3% for the current year. The Zacks Consensus Estimate for the current year has improved 0.4% over the last 30 days. The stock has a dividend yield of 3.1%.

Altria Group, Inc. MO is the holding company for Philip Morris USA, Inc. (PM USA), U.S. Smokeless Tobacco Company LLC (UST), John Middleton Inc., Sherman Group Holdings, LLC and its subsidiaries, Nu Mark LLC, Ste. Michelle Wine Estates Ltd. (Ste. Michelle) and Philip Morris Capital Corporation (PMCC).

Altria has a Zacks Rank #2. The company has expected earnings growth of 18.3% for the current year. The stock has a dividend yield of 5.2%.

Archer Daniels Midland Company ADM is one of the leading food processing companies in the world.

Archer Daniels Midland has a Zacks Rank #2. The company has expected earnings growth of 41.3% for the current year. The Zacks Consensus Estimate for the current year has improved 4.6% over the last 60 days. The stock has a dividend yield of 2.6%.

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