The recent pullback in the market may remind investor's they need to have a prevent defense in their portfolio playbook. While no one can say that the market is on a rapid decline it is a good time to review options for locking in gains when the market rally hits the two-minute warning.
Options for Rising Rates
When it comes to the bull market ending the three-letter word on everyone's mind is FED. When the FED begins to reduce stimulus interest rates are sure to rise. (See our previous article.) we looked at New Residential (NRZ) and Cherry Hill Mortgage (CHMI) as potential beneficiaries of rising rates.
Another option for investors is to increase their exposure to floating rate and senior secured debt obligations or bank debt. A number of ETFs and closed-end funds have emerged with the very popular Invesco Powershares Senior Loan ETF (BKLN) as one of our favorites. Bank Debt investments have the advantage of increasing interest payments to investors as rates increase and being among the more attractive credit products during economic declines given their seniority and collateral.
In market declines often consumer staples stocks are great defensive plays. Investors should be mindful as interest rate go up we expect many global firms will be negatively impacted by a strengthening dollar. The traditional large capitalization names such as Proctor and Gamble, Johnson & Johnson, and others may give way to more domestic names. The ideal investment is Kraft Foods (KRFT) as the spinoff of the North American packaged foods business from the old Kraft, which became Mondelez. Kraft has a healthy 4.0% yield and late last year announced a $3 Billion stock repurchase program.
Utilities may not be the safe havens they once were but there are still well managed companies in this sector with a very stable business to ride out a market downturn. One company to view in is Dominion Resources. (D) Dominion's mid-Atlantic footprint includes the vibrant economic centers outside Washington, DC that often show immunity to economic cycles. Further the company is positioned better than most utilities to benefit from the shale boom. Dominion sports a strong dividend of 3.6%.
Investors would be well served to look at defensive allocations in bank loans, consumer products and utilities that can outperform in a more difficult market.