During periods of heightened volatility in the stock market, it pays to have a diversified portfolio. Investors with all of their eggs in one basket could find themselves sitting on heavy paper losses if one of the sectors in which they have an excessive weighting is the centre of a market sell-off.
Indeed, the market is rather negative towards the oil and gas and the mining sectors, both of which have been brutally sold off.
It is at times like these that we often see so-called ‘defensive’ shares outperform the market as a whole, as investors take flight to perceived safety. With that in mind, I’ve highlighted three very different companies below, each has a different defensive quality, which could offer investors some comfort at times like these.
Randgold Resources
For a significant period following the financial crisis, gold seemed to be the place to go when the market was worried about excessive bank debt, Greece, Europe, China. This drove the price of gold to new highs, sparking criticism for the former Prime Minister, Gordon Brown, who as Chancellor sold most of the UK’s gold reserves between 1999 and 2002.
Conversely, the price rise sent one of the largest UK-listed gold miners, Randgold Resources (LSE: RRS), to new highs. The shares reached an apparent peak of £75 per share in October 2012. Since that peak, the shares have almost halved, the main issue being down to the price of gold, which seems to have lost its defensive shine. The precious metal has fallen considerably from a price of $1,883 per oz in August 2011 to a current price of $1,128 per oz as I type.
So why suggest the company as a defensive hedge? Well, as we know, the company can do little about the price of gold, but if we continue to see heightened volatility in the market, investors may well flock back to gold, causing the price to rise. Indeed, if gold regains its allure for investors, the shares, currently trading at lows not seen since July 2009, could look cheap.
Imperial Tobacco
Whilst not to every investor’s taste, Imperial Tobacco (LSE: IMT) is an interesting suggestion sure to divide investors. However, as we can see from the chart below, the shares have left the FTSE 100 for dust.
For those prepared to invest in a company that manufactures and sells a product that is in structural decline, subject of advertising bans and possibly one of the biggest causes of ill health, the rewards are plain to see. True, sales are declining, but management are aware of this and cut costs accordingly.
For those investors prepared to invest here, the shares offer a 4%+ forecast dividend yield and trade at just over 14 times forward earnings… that doesn’t strike me as expensive for company with such defensive qualities.
National Grid
Last up is National Grid (LSE: NG). Whilst not the most exciting company in the world, it does have annuity-like revenues, with the prices it can charge its customers set by regulators.
Indeed, following renewed volatility in the stock market, the shares have sprung back to life as we can see in the chart above.
Despite the rise in the share price, the shares still trade around 15 times forecast earnings and yield just under 5% — that’s nearly 2% more than the median forecast dividend yield of all dividend payers according to data from Stockopedia.
While it is true that the company operates with a significant amount of debt as it invests in infrastructure, it can borrow more cheaply than most companies, given its predictable income stream, which affords management to continue to pay a bank-beating dividend yield.