3 Defensive Stocks That Will Keep On Chugging

Includes: GIS, KMB, MCD
by: Dividends & Income Daily

I'll just cut to the chase: The market went a little nuts last week, causing a bit of a stir. On Wednesday, the S&P 500 almost tripped over 1,600 during intraday trading. Granted, in itself that's an arbitrary number. But the nearly 2% fall that took us there was the sharpest since February. That's hardly insignificant.

At the same time, the CBOE's Volatility Index (VIX), an oft-cited measure of market volatility, punched through 18, indicating heightened skittishness among investors. No, I'm not trying to ruffle your feathers. And no, I haven't turned doomsayer on you. After all, of the investor concerns that led to last week's slump - the dip in manufacturing, potentially weak employment data and, of course, worries that the Fed might end QE - all turned out better than expected.

In turn, the market gapped back up, closed the week higher, and the VIX has since settled back to cooler-headed levels. So the rally runs onward. And until the next onslaught of data, further broad-market gains are probably in the clear.

But, as always, there's still a lesson to be learned - and it's an old one: Don't get cocky. Nothing lasts forever. A correction is guaranteed, and if anyone tells you they know when it's coming, show them the door. Your investments should reflect that uncertainty. Keeping low-volatility stocks in your portfolio is a must.

Accordingly, I've identified three dividend-paying stocks that, when the market has hit the skids, have historically kept on chugging, busting right through the volatility. (And no - surprise, surprise - they re not utilities.) So without further ado, let's get to it, with Louis Basenese kicking us off with the first stock …

Volatility Killer #1: Kimberly-Clark (NYSE:KMB)

No matter what's happening in the world, consumers don't stop buying goods like paper towels, toilet paper and diapers. Such steady demand translates into steady results for consumer staples juggernaut, Kimberly-Clark.

The stock currently trades at a forward P/E ratio of 21.1. That's noticeably above the S&P's ratio of 16.9, but then again, so is its dividend yield. Now in its 40th consecutive year of dividend increases, Kimberly-Clark currently yields 3.3%, compared to 2.2% for the S&P 500 Index.

And like Consolidated Edison (NYSE:ED) and Johnson & Johnson (NYSE:JNJ), Kimberly Clark's dividend is safe, based on its dividend payout ratio of just 66%. Better still, it's been sharing in the broad-market rally. It's gained 16.9% year-to-date, compared to the S&P's gains of 16.3% over the same period.

Volatility Killer #2: McDonald's (NYSE:MCD)

Even in an increasingly health-conscious world, McDonald's remains as profitable as ever. Granted, it's having a tough time reforming its image. And even Ronald McDonald himself has been coming under fire for pushing "food high in salt, fat, sugar and calories to children," according to a recent petition for his dismissal

Nonetheless, the tale of the tape never lies. And year-to-date, those big red shoes have rung up a return of 14.64%, which is only slightly lower than the S&P's 16.3% over the same period.

Better still, McDonald's has been paying dividends for 36 consecutive years and counting. And in the last three, it's managed an aggressive average growth rate of 11.9%, amounting to a projected yield of 3.13%.

With such a long-running and well-managed dividends program, it's unsurprising that the company maintains a current payout ratio of 54.6%. That's far from signaling any earnings squeeze and will allow for further distribution increases down the road.

Volatility Killer #3: General Mills (NYSE:GIS)

It doesn't quite have the long-running dividend chops of McDonald's or Kimberly-Clark, but General Mills is well on its way.

The nine consecutive years of increases under its belt puts it well into the territory of dividend growth stocks. Especially considering that the raises have been anything but paltry, with an average five-year growth rate of 11% - amounting to a current yield of 3.16%.

Aggressive increases often lead to unsustainable dividends. But General Mills has avoided that trap and currently maintains an entirely manageable dividend payout ratio of 47.5%. That leaves ample headroom for growth, or (God forbid) a slip in earnings.

What's more, with hefty year-to-date gains of 20.58%, the stock is a solid outperformer. And a current price-to-earnings (P/E) ratio of 17.6, which is roughly in line with the S&P 500, means that investors don't have to overpay to participate.

Bottom line: The bull market continues to run strong, even if it showed a few jitters last week. But make no mistake, the time to think about defensive plays is always now.


I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.