Defensive stocks are well known to value investors. These stocks are recognized for being fairly priced and offering investors strong fundamentals. In addition to those shared attributes, defensive stocks are those companies that offer products and services that consumers and businesses need regardless of what’s happening in the economy.
Sticky inflation, interest rates that will be higher for longer, and geopolitical instability are just three macroeconomic indicators that are weighing on equity prices. But these are times when defensive stocks shine the brightest.
Typically, these are companies that will “surprise” to the upside in earnings season. But to savvy investors, those aren’t surprises at all. They’re just further evidence that when it comes to investing sometimes playing offense means concentrating on defensive stocks.
Another common feature of defensive stocks is that they are among the best dividend paying stocks. The three stocks on this list are no exception. As you’ll see that dividend is a significant part of the total return you can expect from these sector leaders.
One critique of defensive stocks is that they don’t offer investors an opportunity for capital gains. One exception to that claim would be McDonald’s (NYSE:MCD). The company’s stock is up a little over 50% in the last five years. That return comes with a beta value of approximately 0.65. That means it’s about 35% less volatile than the S&P 500 which allows investors to get that return with less risk.
On top of the capital gains, investors get a dividend that currently yields 2.40%. In October, McDonald’s increased that dividend for the 46th consecutive year. The new monthly payout is $1.67 per share. That’s an increase of 9.9% from the prior year.
Like many equities in 2023, MCD stock has fallen from grace. After failing to crack the $300 barrier earlier this year, the stock is down 5.17% in 2023 and 15% in the three months ending October 10. However, it appears that the stock is getting support around the $250 level. And a relative strength indicator (RSI) reading of around 30 suggests it is in oversold territory.
PepsiCo (NASDAQ:PEP) kicked off the third quarter earnings season with a bang. The company beat on both the top and bottom lines and raised its guidance for the rest of the year. That’s the kind of performance that investors expect from defensive stocks. That is, a company with a deep, recognizable portfolio and pricing power.
PEP stock is telling a similar story to McDonald’s. In fact, the average growth rate over the last five years is nearly identical at around 10%. And, like McDonald’s, PepsiCo is a low beta stock with a value of 0.55.
Pepsi is also a Dividend King having increased its dividend for the last 52 consecutive years. The current yield is 3.06%. The company last raised its dividend in May, and the increase was 10% higher than the prior level.
Another way that PEP stock is similar to McDonald’s is that it is objectively on sale at the moment. It’s down over 10% this year and is now trading near its 52-week low. Investors seem to be holding a level of support at around $160, making now a good opportunity to initiate or add to a position in PEP stock.
UnitedHealth Group (UNH)
A key thing for investors to remember with any stock, but particularly with defensive stocks, is that the price is just the price. So as you consider the last stock on this list, UnitedHealth Group (NYSE:UNH), remember that it’s value you seek.
Healthcare stocks are still a popular sector for investors. But the sector in general is down for the year. That creates an opportunity to buy one of the industry heavyweights at a nice discount. UNH stock has rallied in the past three months. But even with that 13% gain, the stock is still slightly down for the year (approximately 0.67%).
Of the three stocks on this list, UNH has the highest share price and, not surprisingly, the lowest dividend yield at 1.43%. However, it also has the highest annual payout on a per share basis at $7.52.
UNH stock price has grown 19.5% in the last five years. However, with earnings expected to grow by approximately 12% in the next 12 months, analysts continue to maintain a Strong Buy rating on the stock with a consensus price target that is about 9% higher.
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