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Playing Defense with your Portfolio

22 February 2013 in Trading Ideas

Investors come in all stripes. Some are interested in chasing growth, and will willingly tolerate risk as they do. But for many other risk-averse investors, their main concern is keeping their nest egg as secure as possible. If that sounds like you, the Defensive Dividends motif could be worth exploring. The operative word in the title is “defensive,” as this motif was designed with risk-averse investors in mind.

The companies in the motif all have Investment-Grade credit ratings and are traded on U.S. exchanges . All of them have a market capitalization of more than $5 billion. And all have been screened using stringent criteria for several important accounting metrics, including their ratios for debt-to-book value of equity, and for dividend-to-operating cash flow. And the companies are spread around the different parts of the economy, with no one segment accounting for more than 25% of the motif.

One other thing: None of the companies have cut their regular dividend for at least 10 years.

These factors make these stocks appealing to investors looking to avoid dividend cuts, as well as rapid decay in share prices. Between 1972 and 2010, stocks that cut or eliminated dividends returned -0.5%, compared to a 7.3% return for the S&P 500. Dividend -paying stocks, on the other hand, returned 8.8% in that timeframe.1

Of course the unstable nature of the market can cause the performance of stocks to take an untimely turn for the worse in reaction to changing market conditions. There’s no guarantee that stocks which have followed a steady path in the past can continue down the same road going forward. But for income-seeking investors who are hoping to steer clear of rapid price fluctuations, Defensive Dividends could be the perfect fit.

1http://www.gafunds.com/wp-content/uploads/2012/11/imdf_WhyDividendsMatter.pdf

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