Chasing stocks that are soaring can be tempting — but those gains can vanish quickly amid market volatility. While you may want to pour money into the latest hot investing trends, the best moves are typically more boring.
Utilities and consumer staples are often seen as essential portfolio anchors that can hold up during any economic cycle, and help minimize your losses during sharp corrections. Here’s what to know about sectors that may not seem as exciting as the skyrocketing areas of the market, but can help you reach your long-term financial goals.
The pros of utilities and consumer staple stocks
Demand is constant for essential utilities, gas and water. That makes revenue and net earnings for these sectors more reliable and less subject to sharp price swings. People will need utilities in any economy — and they’re more likely to quit dining out or shopping at retailers then forego the essentials.
Utility stocks may not beat the S&P 500, but they are known for high dividend yields and low volatility. Some utility stocks function similarly to bonds with their limited upside and high cash flow, but dividends are taxed more favorably than bond interest.
While people can cut discretionary spending when finances get tight, it’s a different story for consumer staples like food, hygiene products and cleaning supplies. Not only do these products generate sales in any economy, but the businesses behind these products have pricing power.
A slight increase in the price of groceries won’t stop people from shopping. Consumer staples can turn into valuable inflation hedges that provide long-term cash flow. However, just like utility and infrastructure stocks, investments in the consumer staples industry aren’t known for beating the S&P 500.
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The power of consistent dividends
Sturdy, durable stocks tend to provide consistent dividends that are distributed quarterly. The corporations that give out their dividends also often raise their payouts each year, if they can. Regular dividend hikes indicate good financial health to shareholders (but any pauses in dividend hikes can cause investors to lose confidence).
These types of stocks may be even more valuable for people who are approaching retirement. Aspiring retirees and people who are already living out their golden years can benefit from these types of stocks since they combine low risk and high cash flow.
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Why you should add ‘boring’ stocks to your portfolio
Steady earnings and strong fundamentals can often do more for your portfolio than taking the time to try to find the next stock to take off, which is extremely hard to do, even for professionals on Wall Street.
Each investor should adjust their portfolios based on their financial goals and risk tolerances. Remember that while defensive stocks can help limit losses during downturns, they’re likely to trail some of their counterparts during market upswings.
Investors can choose to buy individual stocks in these defensive sectors or funds that contain these types of stocks. Both approaches minimize your risk while opening the door to some potential upside.
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