(By Michael Vodicka) Any investor who has ever benchmarked the performance of their portfolio against an index knows how hard it can be to outperform the averages. Having only a few holdings slump and dip while index stocks continue to advance can have a devastating effect on the performance of your portfolio. That's why portfolio and hedge fund managers love to stuff their strategies with Dow components, an index of just 30 stocks that you can take a closer look at by clicking on the previous link. It's a great way to keep a portfolio synced up with a benchmark while going for the outperformance with a few select, more aggressive holdings on the peripheral.
And in light of recent market volatility, anyone with a portfolio of high flyers, small caps or growth stocks has been subjected to some serious volatility. So in order to keep your portfolio more tuned up with the averages and defensive against market volatility, here is a list of my Top 3 most defensive Dow stocks.
Top 3 Defensive Dow Stocks
Not only is Wal-Mart one of the largest companies in the Dow Jones Industrial Average, it's also one of the largest companies in the world, with a market cap of $230 billion. Although that means Wal-Mart is most likely past its most aggressive stages of growth, it also means that its dominant presence in its market provides additional stability to its business and outlook. One of the company's specialties is selling consumer staples like toilet paper, tooth paste and a growing list of food items. Regardless of underlying economic conditions, these are generally things people can't live without, providing more stability on the demand front. Wal-Mart also pays a pretty solid dividend, with a current yield of 2.3% ahead of both the S&P 500 and yield on a 10-year Treasury Note. The company's defensive nature has been on display this year, with shares up 12% as it continues to attract inflows from investors moving away from growth and into stability.
Verizon Wireless (VZ)
This might not seem like the most defensive stock in the world at first glance, but a deeper look reveals a company that fell less than the Dow in the financial crisis of 2008 and 2009 while also rallying more than the index in the bullish market of the last two years, with shares up an impressive 50% compared to the Dow's 20% gain. That's an incredible combination of defensiveness and growth that is very hard to find on the Street. The attractiveness of this stock in a weak market definitely has something to do with its dividend, currently yielding a very outsized 4.6% that is more than double what you can get from a 10-year Treasury Note and in line with investment grade corporate bonds. The defensive nature of this stock has also been on display this year, with shares up 8% against the Dow's extremely volatile 4% gain. But in spite of that bullish movement, the valuation picture still looks solid, with a PEG multiple of 2.36X below the 10-year median of 2.62X and much closer to the period low of 1.03X than high of 4.55X.
The Coca-Cola Company (KO)
Coca Cola is one of the most recognized and global brands in the world, with operations and distribution networks spanning the globe. Much like Wal-Mart, which means Coca-Cola is a huge company, classified as a mega cap with a value of $172 billion. And also like we saw from Verizon, the company's share price fell less than the Dow during the financial crisis of 2008 and 2009 while also rallying more than the Dow Jones over the last two years, posting an impressive gain of 45%. As a mature company, Coca Cola also pays a pretty solid dividend, currently yielding 2.7%. Shares are up 8% on the year in the bumpy market, nicely beating the Dow once again. The valuation picture does look a little hot here in light of recent gains, with a PEG multiple of 2.3X trending ahead of the 10-yar median of 2.03X. But if you are looking for a strong global brand with customer loyalty and little elasticity, this is a good place to look.
The Take Away
Tracking the averages can be very difficult for a portfolio that is heavy on small-caps, mid-caps or hyper-growth stocks. That's why creating a core strategy that is based upon blue chips and index stocks can be so valuable in a volatile or weak market. There are a total of 30 Dow components, so having a core strategy of 4 or 5 Dow stocks will go a long way to protect your portfolio from an outsized under-performance.
2012 YTD-Dow vs. WMT, VZ and KO