Utility Stocks For A Recession

“Are you afraid of a recession?”  My stomach turned when a friend asked me yesterday.  The global markets are bouncing like a yo-yo in the hands of a 3 year old.  Huge bank losses, falling home prices, and rogue traders losing billions are the news de jour.  In addition, the 200 day moving average on the S&P 500 went negative for the first time in years.  The recent Federal Reserve emergency rate cut of 75 basis points was just icing on the cake.

The smell of fear is everywhere and I could sense it in the question.

The Fed just made one of the largest rate cuts in the last 20 years.  What did they see that warranted action like that?  Rumors are swirling of another rate cut.  This time 50 basis points are expected at the Fed meeting on January 30.  Recent news out of Washington is not about the presidential primaries, it’s all about the economic stimulus plan.

Recession is clearly the word of the day.

Greg Petriekis, in his Monday article, “Why You Need to Hedge this Market Now!” hammered home a great point.  Everyone who is invested in the market needs to have a hedge in place to protect their portfolio from catastrophic loss.  You can accomplish this by investing in industries that traditionally have done well in market downturns.

But before I go any further . . . .

One unintended consequence of the Fed rate cut was to push down yields on government bonds.  The yields you can capture today are very anemic.  Shortly after the rate cut on Tuesday, the 30 year long bond yield fell below 4.15%.  This was the first time this has happened since being introduced in 1977.

Look at the yield on the long bond over the last few months.  It isn't a pretty picture.  The blue line you see is a 50 day moving average which  highlights the general trend.

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With bond yields falling as quickly as they have, investors looking to capture yield are seeking out other sources.  Dividend paying stocks are a natural alternative as they provide stable payouts and in the right situations can contribute capital growth as well.

So, back to the question at hand . . .

Where can we invest to protect our portfolio from a recession AND capture higher yields?

I did a bit of research.  I started by looking at stocks in the S&P 500 which have market capitalizations in excess of $5 billion.  I then removed all of the companies that didn’t have at least a 5% dividend yield.  I also removed any companies related to the banking and real estate industries as their dividends might be at risk.

I was left with a handful of companies, most of which were utilities.

Historically, the industries that do the best in market downturns include tobacco, healthcare, food stocks, and utilities.  Here's the list of these utilities:

  Ameren (AEE) 5.59%
  Consolidated Edison (ED) 5.32%
  DTE Energy (DTE) 5.06%
  NiSource (NI) 5.02%
  Progress Energy (PGN) 5.56%

As you can see, these companies provide robust yields.  If you're seeking market protection and want higher yields then consider adding these to your portfolio.

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