If the market drop this year has taught us anything, it is that it reinforces the reality of defensive stocks. In fact, these stocks are easy to spot as they pay dividends and offer substantial yields.
Between the 2011 weekly closing high on March 4 and the weekly closing low on Sept. 23, the Canadian stock market lost 19.6% of its value, as measured by the S&P/TSX composite index.
In early October, the benchmark index crossed the 20% decline threshold, entering official bear market territory. Nevertheless, this broad index includes some mighty exceptions in the downswing, through to Sept. 23:
> The decimated income trust index managed to rise by 1.5%. Despite a drop in its indicated distributions, this group’s yield remains well above 5%. The group now trades at less than 10 times earnings.
> Telecommunications and utility stocks are core defensive plays — and they came through again. Telecom services rose by 6.4% and utilities by 1.3% during the period in question. The common feature among both sectors’ stocks is that they have yields in the 4.8%-5% range.
> Energy stocks may not be high in appeal these days, with the S&P/TSX capped energy index down by 34.6% during the downturn. However, the refining group’s subindex gained by 19.5% and pipelines by 8.2%. The dividend yields of both groups are above 4%. (See story on page 37.)
The S&P/TSX’s dividend-tracking indices all dropped in price, but their dividends have increased during the year. The S&P/TSX Canadian dividend aristocrats index — a group of stocks with five-year records of increasing dividends — dropped by 7.4%. The S&P/TSX equity income index lost 11.8%, lifting its yield to 5.8%. The S&P/TSX composite dividend index didn’t fare well, either, dropping by 17.9% in price.
Consumer stocks — also considered defensive plays — dropped in price along with every other group on the TSX board. Their losses, mind you, were smaller than most. The S&P/TSX capped consumer staples index lost only 2.5%; the downside is this index yields only 1.9%. The consumer discretionary index dropped by 16.7%, and now yields a more attractive 3.1%.
Real estate investment trusts also suffered little in the year’s drop, while maintaining a 5.7% yield on distributions. Another attraction now: they trade at a low eight times earnings.
The September market blitz hit gold-mining shares, which, despite that hit, registered a loss of only 1.3% from March to September. A point worth noting is the continued increase in gold-mining stocks’ dividends. In 12 months, global gold index dividends have increased by 23%.
Looking ahead, the high relative strength rankings of utilities, telecoms and income trusts over the past six months indicates they are the most likely market leaders over the next three to six months. They should be among the top gainers if the market rises and the smallest losers should the market drop. Real estate, gold and consumer staples stocks are also likely to be among the market leaders in the next few months.
Weakest-ranking sectors are paper and forest products, energy, diversified mining and metals, and industrials. Small-cap stocks also rank low in relative strength, so they may be stocks your clients should now avoid. IE