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Many investors, such as Warren Buffett, praise defensive investing. Buffett says the first rule of investing is not to lose money, and the second rule of investing is not to forget the first rule. The mentor of this legendary investor, Benjamin Graham, always recommended defensive investing with a margin of safety.

On the other hand, defensive investing in some sectors - like basic materials (chemicals, metals and energy excluding utilities) - doesn’t always bring the best returns, but it usually provides better protection in down markets. As markets exit from recession and commodities generally perform well, it is not surprising to see that the risky basic materials stocks with low dividend yields benefit from the uptrend more than the basic materials stocks with high dividend yields.

Since we are concerned about the Fed’s loose monetary policy, however, we believe investors should be cautious about the upcoming inflationary environment. In order to be protected against inflation and further declines in the market, now may be a good time to play more defensive and switch to high dividend yielding stocks.

We compiled a list of the top 30 S&P 500 basic materials stocks (The sector classifications are sourced from Finviz and the market data are sourced from Fidelity) by market cap and ranked them based on their annualized dividend yields. The top and bottom halves and their performances are shown below.

HIGHER DIVIDEND YIELDS

Dividend Yield

YTD Return

52-Week Return

Spectra Energy Corp.

SE

4.28%

-0.86%

15.32%

ConocoPhillips

COP

4.09%

-2.62%

16.75%

DuPont

DD

3.51%

-4.95%

13.87%

The Dow Chemical Company

DOW

3.41%

-13.03%

15.32%

Chevron Corp.

CVX

3.34%

3.93%

21.76%

Williams Companies Inc.

WMB

2.96%

10.55%

33.22%

PPG Industries Inc.

PPG

2.95%

-6.19%

13.83%

Air Products & Chemicals Inc.

APD

2.89%

-10.64%

6.73%

Exxon Mobil Corp.

XOM

2.62%

-0.95%

17.54%

Marathon Oil Corp.

MRO

2.36%

14.47%

24.79%

Freeport-McMoran Copper&Gold

FCX

2.22%

-23.95%

22.59%

Occidental Petroleum Corp.

OXY

2.18%

-13.18%

11.70%

Newmont Mining Corp.

NEM

2.17%

-9.21%

-2.09%

Praxair Inc.

PX

2.12%

-0.10%

8.50%

Monsanto Co.

MON

1.78%

-2.24%

14.97%

AVERAGE

-3.93%

15.65%


LOWER DIVIDEND YIELDS

Dividend Yield

YTD Return

52-Week Return

Schlumberger Limited

SLB

1.29%

-6.49%

25.23%

Chesapeake Energy Corp.

CHK

1.20%

13.00%

33.89%

Noble Energy Inc.

NBL

1.02%

1.13%

25.36%

Devon Energy Corp.

DVN

0.99%

-12.11%

6.29%

Baker Hughes Inc.

BHI

0.99%

7.01%

46.73%

Alcoa Inc.

AA

0.98%

-20.00%

5.79%

Halliburton Company

HAL

0.80%

10.00%

47.11%

Peabody Energy Corp.

BTU

0.74%

-27.91%

-5.01%

Hess Corp.

HES

0.71%

-26.62%

0.50%

EOG Resources Inc.

EOG

0.70%

-0.13%

-8.52%

National Oilwell Varco Inc.

NOV

0.66%

-0.98%

62.84%

Apache Corp.

APA

0.59%

-14.03%

6.69%

Anadarko Petroleum Corp.

APC

0.53%

-10.17%

21.78%

El Paso Corp.

EP

0.22%

32.65%

43.74%

Southwestern Energy Co.

SWN

0.00%

-2.64%

-3.14%

AVERAGE

-3.82%

20.62%

In the last 52-week period, the top 30 S&P 500 basic materials stocks gained 18.14% vs. 3.97% for the SPY. During this period, lower dividend yielding basic materials stocks performed better than higher dividend yielding ones, as expected. The average return of the 15 high dividend yielding S&P 500 basic materials stocks was 15.65%, underperforming the average return of the 15 lower yielding basic materials stocks by almost five percentage points.

However, basic materials stocks performed negatively and lost -3.77% since the beginning of this year. In this period, the average YTD return of the 15 high dividend yielding basic materials stocks was -3.93% vs. -3.82% for the second group of 15 stocks. As the returns of the two groups are comparable in 2011, it seems now is a good time to rotate into high dividend yielding basic materials stocks.

Here are the top 10 S&P 500 basic materials stocks with the highest dividend yields:

1. Spectra Energy Corp. is a U.S. energy pipelines company that processes, transmits and distributes natural gas in the United States. SE has a 4.28% dividend yield and returned 15.32% during the past 12 months. SE recently traded at $24.31 and returned -0,86% year-to-date. The stock has a market cap of $15.04B and P/E ratio of 13.73. Daniel Bubis’ Tetrem Capital holds the largest SE position among the 300-plus funds we are tracking.

2. ConocoPhillips is an energy company delivering various energy products worldwide. COP has a 4.09% dividend yield and gained 16.75% during the past 12 months. COP performed negatively since the beginning of this year, losing -2.62% year-to-date. The stock has a market cap of $85.02B and P/E ratio of 7.80. Warren Buffett had a massive $2 billion worth holding in COP (see Warren Buffett’s other massive holdings here).

3. DuPont is a U.S. company providing a wide range of science-based products and related services worldwide. DD has a 3.51% dividend yield and returned 13.87% during the past 12 months. DD performed negatively since the beginning of this year, losing -4.95% year-to-date. The stock has a market cap of $43.56B and P/E ratio of 12.94. Jim Simons is the most prominent DD investor, holding more than $40 Million of the stock (check out Jim Simons’ top stock picks).

4. The Dow Chemical Company is a global corporation providing plastics, chemicals and agricultural products worldwide. DOW has a 3.41% dividend yield and returned 15.32% during the past 12 months. DOW performed negatively since the beginning of this year, losing -13.03% year-to-date. The stock has a market cap of $31.98B and P/E ratio of 13.35. Joshua Berkowitz, Mark Kingdon and Ken Griffin are among DOW's investors.

5. Chevron Corp. is a large U.S. energy company operating worldwide. CVX has a 3.34% dividend yield and returned 21.76% during the past 12 months. CVX recently traded at $93.40 and returned 3.93% since the beginning of this year. The stock has a market cap of $187.08B and P/E ratio of 8.16. Phill Gross’ Adage Capital holds more than $300M of CVX (see Phill Gross’ favorite stocks here).

6. Williams Companies Inc. is an energy company that explores, produces and transports natural gas and petroleum in the United States. WMB has a 2.96% dividend yield and returned 33.22% during the past 12 months. WMB also performed well since the beginning of this year, gaining 10.55% year-to-date. The stock has a market cap of $15.92B. Michael Lowenstein’s Kensico Capital had more than $300 Million of WMB at the end of March.

7. PPG Industries Inc. is a U.S. manufacturer providing coatings and speciality products to construction, industrial and transportation industries. PPG has a 2.95% dividend yield and returned 13.83% during the past 12 months. PPG performed negatively since the beginning of this year, losing -6.19% year-to-date. The stock has a market cap of $12.18B and P/E ratio of 12.19. Ken Fisher holds more than $600 Million of PPG (check out Ken Fisher’s other top holdings).

8. Air Products & Chemicals Inc. is a U.S. company providing chemical products to various industries. APD has a 2.89% dividend yield and returned 6.73% during the past 12 months. APD performed negatively since the beginning of this year, losing -10.64% year-to-date. The stock has a market cap of $17.10B and P/E ratio of 15.06. Phill Gross and Ric Dillon are the most prominent APD investors.

9. Exxon Mobil Corp. is a giant U.S. company that manufactures and sells branded motor fuels and related products worldwide. XOM has a 2.62% dividend yield and returned 17.54% during the past 12 months. XOM recently traded at $71.64 and returned -0.95% year-to-date. The stock has a market cap of $341.27B and P/E ratio of 9.41. Phill Gross and Ken Fisher are large XOM holders with $600 million positions.

10. Marathon Oil Corp. is an American energy company that explores and produces natural gas and oil worldwide. MRO has a 2.36% dividend yield and returned 24.79% during the past 12 months. MRO also performed well since the beginning of this year, gaining 14.47% year-to-date. The stock has a market cap of $16.64B and P/E ratio of 8.41. Jerry Altman’s Owl Creek Asset Management has the largest MRO position, holding more than $200 million of the stock.

Source: Invest Now in High Dividend Yielding Basic Materials