A Trio of Solid Defensive Stocks

07/25/2011 12:30 pm EST


Charles Carlson

Editor, DRIP Investor

There’s been a continual shift to defensive, income-oriented shares since the second quarter, and these three top the list, writes Charles Carlson of the DRIP Investor.

Classic defensive sectors, such as utilities, consumer staples, and health care, have done quite well in the second quarter against other market segments.

I’ve been discussing this transition to more defensive dividend payers for months, and it is a transition that is likely to have legs. Thus, investors should consider broadening their exposure to quality defensive stocks.

I have compiled a shopping list of defensive stocks that represent the top picks in their industries:

NextEra Energy (NEE)
The utility sector has picked up nicely in the last three months, and I expect the group to continue to do well. In the group, NextErais especially interesting. The Florida-based utility is the nation’s largest provider of alternative energy (solar and wind).

The stock has performed well in recent weeks, and I expect these shares to continue to move higher in the near term. The yield of nearly 4% is a bonus.

NextEra Energy offers a direct-purchase plan whereby any investor may buy the first share and every share directly from the company. Minimum initial investment is $100.

PepsiCo (PEP)
The soft-drink and snack-food giant has pulled back only moderately from its 52-week high of $71.89. PepsiCo’s yield of 3% is a 50% premium to the yield on the S&P 500, and around the rate of a ten-year Treasury note.

Thus, the stock should find support from growth, value, and income investors. I remain a fan of these shares, and expect them to outperform the overall market in the second half of 2011.

PepsiCo offers a direct-purchase plan. Minimum initial investment is $250.

Bristol-Myers Squibb (BMY)
Health-care stocks as a group have held up fairly well during the downturn, which is to be expected given the defensive qualities of health-care companies and the healthy yields many health-care stocks are sporting.

Bristol-Myers Squibb currently yields nearly 5%, a sizable yield relative to many bonds and money-market instruments. The annualized dividend rate of $1.32 per share is well covered by the expected 2011 earnings of $2.20 per share.

The company’s blockbuster Plavixanti-clotting drug goes off patent in May 2012, and there is concern as to how Bristol-Myers is going to replace the lost revenue. Plavix accounted for more than one-third of the firm’s total sales in the March quarter.

However, the company has been active in bringing new products to market, which should offset some of the revenue loss from the Plavixpatent expiration. The low-end analyst estimate for 2012 profits is $1.90 per share, still well above the current annualized dividend rate of $1.32.

I like these shares for growth and income. Look for the stock to continue to show good relative performance.

Bristol-Myers Squibb offers a direct-purchase plan. Minimum initial investment is $250.

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