Daily Gains Letter

The Best Stocks for Cushioning Your Retirement Portfolio

By for Daily Gains Letter |

defensive stockWord on the street is that the U.S. Federal Reserve will soon be announcing its intention of keeping interest rates low for a long time. While this may be good news for first-time home buyers looking to lock their mortgages in at near-record-low rates, it’s terrible news for anyone with a retirement portfolio made up of fixed-income investments like cash, bonds, and annuities.

To make up the ground lost to artificially low interest rates, investors may need to rebalance their retirement portfolio to include a higher allotment of stocks. But where should investors turn? During the first five months of the year, it was pretty hard to lose money on the stock market.

Between January 2 and May 21, the day before the Federal Reserve hinted it would scale back its $85.0 billion-per-month quantitative easing policy, the S&P 500 was up more than 17%. Since then, the Federal Reserve-inspired roller coaster has rewarded patient investors with a one-percent return.

For much of June, the S&P 500 experienced a volatile ride, with investors wondering just how well Wall Street would do without the intervention of the Federal Reserve. To calm investors, the Federal Reserve intervened and said that there is no hard and fast set time for any tapering. Not only that, the Federal Reserve said that eventually cutting back won’t necessarily translate into higher interest rates. Disaster averted!

What that means is that those with large sums of money to plunk down on the stock markets will continue to do well. While those with their money tied up in their homes—the majority of Americans—will not.

Those investors parked somewhere in between faced with sustained near-record-low interest rates are on the hunt for alternatives to low-yielding bonds and other barely there fixed-income products.

When the economy is doing well, investors tend to pile into cyclical stocks because they think they offer the greatest opportunity for growth. Unfortunately, there is a disconnect on Wall Street; the markets are doing well, but the American economy isn’t.

As a result, non-cyclical, or defensive stocks (consumer staples, health care, and utility) continue to perform well, and can provide dividend-yield-starved investors a much-needed cushion to their retirement portfolio.

But not all defensive stocks are performing in step. Cigarette maker Altria Group, Inc. (NYSE/MO) is a defensive stock that has seen its share price climb roughly 91% over the last three years and 14.14% year-to-date. Johnson & Johnson (NYSE/JNJ), another defensive stock, is up almost 76% over the last three years and 34% year-to-date.

On the other hand, some lesser-known defensive stocks have been outperforming their larger-cap peers.

Americans may have less money to put in the bank, but they’re definitely conscious about what they put into their bodies. Healthy baked goods provider Flowers Foods, Inc. (NYSE/FLO) is a defensive stock that is up 136% over the last three years and 47% year-to-date. Natural and organic food provider The Hain Celestial Group, Inc. (NYSE/HAIN) is a defensive stock champion that has seen its share price rise 256% over the last three years and 32% year-to-date.

With U.S. and global economic growth expected to remain muted and artificially low interest rates firmly entrenched, now is not the time for investors to turn their backs on defensive stocks.

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