Over the last few days everyone’s portfolio has seen dramatic volatility; here at Dividend.com our readers have been asking a difficult question: “How do I keep my portfolio safe in times of extreme uncertainty?”
Capturing dividends is the clear answer to this question because dividends produce cash flow for investors, reducing overall market risk.
But which areas are best for applying this strategy?
Here’s where it gets a little tricky as there are two possible approaches.
1. The Popular and Historically Traditional Approach
Historically, managers have moved their money into the health care sector when the market gets risky because people need health services in both good and bad economies. Because of this, health care assets should perform better in economic downturns than the general market.
Health Care-Driven Investments:
AbbVie (ABBV ): AbbeVie Inc. develops, researches, and sells pharmaceutical products worldwide. The company has 28,000 full-time employees and pharmaceutical products across a wide range of disease vectors.
- Beta: 1.56
- 52-Week Change: 8.99%
- Dividend Yield: 3.27%
AstraZeneca PLC (AZN ): AstraZeneca PLC develops, researches, and sells medicines for the treatment of cardiovascular, metabolic, respiratory, and neurological diseases, among others, worldwide.
- Beta: 0.78
- 52-Week Change: -17.66%
- Dividend Yield: 2.86%
Abbott Laboratories (ABT ): The company manufactures and sells health care products worldwide. It’s major product lines are generic and branded pharmaceutical products, medical diagnostics, including DNA and RNA testing, vascular products, nutritional products, and medical services and products for the eye, such as LASIK surgery.
- Beta: 1.24
- 52-Week Change: 0.70%
- Dividend Yield: 2.22%
Medtronic PLC (MDT ): Medtronic manufactures and sells device-based medical therapies worldwide. The company’s major operating segments are cardiac and vascular, such as pacemakers, minimally invasive therapies, such as stomach stapling, restorative therapies, such as bone grafting, and the Diabetes Group which handles insulin pumps and other related products.
- Beta: 1.47
- 52-Week Change: 10.29%
- Dividend Yield: 2.14%
2. The Contrarian Approach
On average, commodity prices are depressed during economic downturns, so the contrarian approach suggests buying assets that have values derived from these commodities while they are cheaply priced. Dividend investments are a great way to invest using this approach because investors capture dividends while they wait for commodity price upturns.
Commodity-Driven Dividend Investments:
CVR Partners (UAN ): A limited partnership based in Texas, the company produces, distributes and markets nitrogen-based fertilizers throughout North America. UAN also provides ammonia products for industrial and agricultural customers.
- Beta: 0.57
- 52-Week Change: -31.92%
- Dividend Yield: 14.72%
Enterprise Products Partners (EPD ) offers midstream energy services to producers and consumers of natural gas, natural gas liquids, crude oil, petrochemicals, and refined products in the United States and internationally. The company operates approximately 19,400 miles of NGL pipeline, 19,300 miles of onshore natural gas pipeline, and 5,400 miles of onshore crude pipeline.
- Beta: 0.81
- 52-Week Change: -34.86%
- Dividend Yield: 5.73%
ConocoPhilips (COP ) explores, produces, transports, and markets crude oil, natural gas, high-quality coal, liquefied natural gas, and natural gas liquids worldwide. Its portfolio includes shale oil, oil sands, and low risk legacy assets in North America, Europe, Asia, and Australia. The company has 18,100 full-time employees.
- Beta: 0.78
- 52-Week Change: -47.93%
- Dividend Yield: 6.91%
Olin (OLN ) manufactures and sells chlor alkali chemical products and ammunition in the United States and worldwide. Chlor Alkali products are used in a wide array of industrial processes such as paper manufacturing, water sanitation, chemical manufacturing, textile manufacturing. The company also produces hydrochloric acid for steel manufacturing, oil and gas, and plastics.
- Beta: 1.03
- 52-Week Change: -30.53%
- Dividend Yield: 4.24%
Review of the Main Points
These strategies have different profit drivers and move up and down at different times than the rest of the market.
For example, consider an investment in an oil company right now. Oil has seen a historic decline in price, surpassing its 2009 lows. While there is little reason to believe that oil prices will skyrocket in the near future, there are also strong signs that the oil market has stabilized around its manufacturing cost of $30 per barrel.
The evidence of price stability suggests it could be a good time to invest in oil-related assets as you are buying in near a historic low. Since it is difficult to time the market, an investor should consider an energy company that pays dividends, and get paid to wait. Eventually when oil prices do rise, the investors will benefit from increased asset prices while continuing to capture strong dividends.
The Bottom Line
Commodities move up and down depending on the supply and demand for the commodity, but commodity suppliers reduce supply in low price environments. When the general economy does begin to pick up steam, commodities should be the first ones to show it due to an increased demand pulling on a reduced supply number.
Health care is similar. People typically use health care products and services depending on what they can afford, however, some health care situations are life or death, which disconnects them from the rational forces of market supply and demand.
In the end, it’s up to you, as an investor, to analyze your portfolio needs and choose the path best for you.
Image courtesy of dan at FreeDigitalPhotos.net
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