The winter holiday season is kicking into high gear now. With that in mind, it’s time to start positioning your portfolio for 2020. It’s a great time to cut loose some stocks that have stopped working and redeploy the capital elsewhere. Tax-loss selling in particular can make for a great time to jettison some old positions and pick up more promising stocks to buy going forward.
And now, as 2019 winds to a close, it’s time to start thinking about more defensive stocks. Over the past two months we’ve seen a clear rotation out of pure growth stocks into more value-oriented names. Particularly with the move in interest rates, investors will demand safe income-paying stocks to buy in 2020. Here’s seven safe stocks that should be great buy-and-hold candidates for at least the next year.
Dividend Yield: 7.6%
It appears that the bottom may be in for the tobacco stocks. The sector has rallied sharply since I highlighted it recently. As these things tend to do, it appears the general media scare around vaping illnesses is starting to taper off. Additionally, more and more focus is going to the vaping of THC, often in illicit cartridges. Very few of the reported lung problems so far have been tied to Juul or other credible regulated nicotine suppliers.
This doesn’t mean Juul’s problems will go away overnight. In the long run, however, I expect Altria (MO) to make money on its vaping investment. That’s in sharp contrast to the market, which has recently been pricing MO stock as if the company will need to write off the full investment entirely.
As it is, Altria’s existing cigarette sales along with cash flow from its stake in Anheuser-Busch (BUD) is enough to cover the dividend. If and when Juul starts providing meaningful cash flow to Altria, it will support a higher share price and dividend — but you don’t need to justify the current $46 MO stock price and greater than 7% dividend yield. Over the long haul, tobacco companies have continued to make tremendous amounts of cash flow despite considerable regulatory intervention and downright hostile media coverage.
Vaping worries will pass sooner or later; the desire to consume nicotine, however, isn’t going anywhere. By the end of 2020, people that bought Altria when it was cheap will be enjoying their dividends with the vaping scare already long forgotten.
Dividend Yield: 4.1%
It’s almost unbelievable that Wells Fargo (WFC) stock remains this much of a value. The company has announced all sorts of good news this year, but the share price hasn’t gone anywhere yet.
The company brought in a highly credible new CEO in the form of Charles Scharf, the former head of Bank of New York Mellon (BK) and Visa (V). Those are two of the largest and most reputable financial firms in the country. Wells Fargo’s critics had slammed the company, saying management was untrustworthy and that the company couldn’t attract a competent outsider CEO. The board proved them wrong and brought in a superstar new chief executive. Scharf’s particular competence in financial technology matters will assist Wells Fargo greatly.
WFC’s earnings have also come in stronger than expected. People have been slamming the bank stocks all year. As interest rates have dropped, people are afraid of what will happen to banks’ profit margins. Yet Wells Fargo’s diversified business has continued to generate steady earnings despite the net interest margin headwind.
That point, combined with the company’s excess capital position, leads to the dividend. Since the 2008-2009 financial crisis, companies have stockpiled capital in response to regulatory demands. Capital levels reached historically extreme levels, in fact. Now the regulators are starting to loosen up a bit, and that is letting the banks put money back to work. Wells Fargo is doing so with both a double-digit dividend increase this year and a massive share buyback. Management intends to repurchase more than 10% of all outstanding WFC stock over the next year. With the company paying an over 4% dividend and providing a massive persistent bid under the share price with the buyback, Wells Fargo is a great safe stock holding for 2020.
Johnson & Johnson
Dividend Yield: 3%
Johnson & Johnson (JNJ) isn’t the most exciting stock on this list by any means. But it is one of the safest. In fact, the company has been a bedrock of conservative portfolios for an entire century now. And nothing has changed. The company remains well-diversified with business operations spanning prescription drugs, consumer health and hygiene products, and medical devices.
J&J runs as a decentralized firm, giving each unit independent management and operating authority. This creates a high level of resilience, as Johnson and Johnson has always been able to offset weakness from any one division or product with strength in others. Now, for example, the company is seeing weakness in consumer products but strength elsewhere has balanced it out.
Why JNJ stock for 2020 in particular? Recently, the company has been dinged by lawsuits for both its involvement in the opioid crisis and various other matters. It just got hit with another scare this past week, as JNJ stock slumped on news of a baby powder recall. However, some folks tend to trade the headline and not think about the longer-term impact. Generally, J&J is able to get fines reduced greatly on appeal, and despite many decades of making sometimes controversial healthcare products, it has rarely gotten stung with true shareholder-value destroying liabilities.
With JNJ stock down 20% from its highs despite a strong rally in defensive stocks, there’s a great argument for locking in the stock’s rock-solid dividend for 2020, along with a potential run-up in the share price to $150 as lawsuit fears diminish.
Dividend Yield: 5.9%
Dow (DOW) is not the safest company on this list. There’s generally a trade-off between dividend yield and safety of said dividend. But at least through the end of 2020, Dow should be able to maintain its current dividend level, offering shareholders an almost 6% yield. And the stock price could appreciate nicely as current recession fears and worries about the chemical market recede.
Simply put, Dow is a high-yield company that also faces significant potential trade war disruption. Throw in all the confusion around the recent spinoff, and investors don’t quite know what to make of the new DOW stock. My take, at least through the end of 2020, is to look for a safe 6% dividend yield and the possibility of some nice share price upside if global economic sentiment improves.
Already, we’ve seen some significant improvement on the economic front. Not only does data keep coming in reasonably strong, now the yield curve has reverted to normal. Remember everyone panicking over the yield curve inversion a few months ago? That’s gone now. A company like Dow wins the most as the economic tide rises again. At 11 times forward earnings, DOW stock is a bargain too.
Dividend Yield: 3.3%
Looking to park some money away for safekeeping at a higher interest rate than you’d get at the bank? Why not consider stowing it at Public Storage (PSA)? Real estate investment trusts have been hard stocks to buy lately — the sector has soared to new all-time highs as investors hunt for yield. This has made valuations extremely expensive for real estate stocks in general.
Due to concerns about pricing and capacity in the self-storage space, REITs like Public Storage have trailed their peers to an extent. PSA stock is up nicely this year, but it’s still well short of its all-time highs, at least for the time being.
That could change in 2020 though. New self-storage site building has slowed down dramatically. Meanwhile, the industry remains fragmented with mom-and-pop operators holding a major portion of the business. This gives Public Storage the opportunity to keep using its industry-best balance sheet to pick up properties opportunistically and create additional growth. And at worst, PSA stock would tread water, safely kicking out its rock-solid dividend as Americans continue to store their belongings, regardless of the economic winds.
Dividend Yield: 3.3%
Walgreens (WBA) is having a bad year. And this bad year comes on top of a series of mediocre ones. Dating back to 2013, WBA stock has been merely flat during a raging bull market. Don’t bet against Walgreens forever though. In fact, 2020 could be the rebound year for WBA stock.
You may not know Walgreens as a safe conservative stock play. Historically, Walgreens has had a surging share price, and as a result, a relatively low dividend yield. Things have changed though. With the prolonged stagnation in the share price, Walgreens’ dividend yield has now moved up to 3.3%.
That’s in large part because Walgreens’ earnings continue to grow, and it pays a higher and higher dividend with every passing year. In fact, it’s a dividend aristocrat stock with more than 25 years of consecutive dividend hikes.
There are long-term concerns about the company’s business model. Drug pricing is a question mark, and investors fear that Walgreens will earn lower profit margins on prescriptions in the future. Meanwhile, front-of-the-store sales of convenience goods such as soda and candy may be pressured due to the changing retail climate. Still, Walgreens has proved resilient over the decades and any sort of political clarity on drug pricing in 2020 as the election plays out could send WBA stock sharply higher. In the meantime, enjoy the stock’s highest dividend yield in ages.
Dividend Yield: 1.2%
If you’re a newer investor, you may not have heard of Novo Nordisk (NVO). You’ve certainly heard about its products though. Novo is the world’s leader in producing insulin and other therapies for diabetes. As the diabetes public health crisis continues to worsen both in the U.S. and abroad, Novo’s importance in the global healthcare system increases with every passing year.
Short of some massive dietary and lifestyle changes, it’s hard to imagine a world in which the rate of diabetes declines significantly in coming years, given current demographic trends. This, in turn, will ensure that Novo Nordisk has much work to do.
NVO stock is still down significantly from its all-time highs. There was a major concern about insulin pricing a couple years ago, and even with that largely resolved, shares aren’t back to their peak — yet. The company just picked up a huge regulatory approval, adding a specific catalyst to the company’s already powerful demographic tailwinds. Novo pays a steadily rising dividend (as measured in its home currency, Danish Kroner) and should enjoy a significant share price increase in 2020 as well, making it a perfect growth and income opportunity in a defensive safe stock.
At the time of this writing, Ian Bezek owned DOW, JNJ, MO, NVO, PSA, WBA and WFC stock.
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