Further downside selling pressure swept global markets lower last week, with the breakdown led by the Shanghai Index slipping below 3,000 and closing down another 3.5% to finish trading at 2,900 on Friday, Jan. 15. The other shoe to drop was WTI crude, falling below $30 per barrel and testing the low $29/bbl. level.
There is real investor concern that credit markets tied to oil, materials, metals and emerging markets will begin to see defaults accelerate in the weeks ahead without a serious rebound in sight and without a clear catalyst. Clearly, the dash for cash among investors heading into the three-day Martin Luther King Jr. holiday weekend took hold.
While the RBS Capital Markets call of “sell everything except investment grade bonds” seems too draconian to me, we have to remember that that investment firm received bailout funds in 2008-09, so it should not be surprising it is sounding the alarm to hit the exits. Nonetheless, it is a pretty brazen call when there are so many blue-chip companies that are devoid of the risks associated with the strong dollar, the drop in oil prices, China’s slowing rate of growth and emerging market debt.
There is shelter from this market storm and it just happens to be within the U.S. utilities sector, which seems to be the go-to safe zone. Even the consumer staple sector, which encompasses all the kitchen and bathroom stocks, has succumbed to the trap door sell-off. Shares of Kraft Heinz (KHC), Colgate-Palmolive (CL), General Mills (GIS) and Procter & Gamble (PG) are dipping as investors reduce their positions and raise cash. Kimberly-Clark (KMB), Clorox (CLX) and Kellogg Co. (K) are holding up the best within the group.
Even as those three stalwarts have held the fort, their dividend yields are below 3%. Investors hunting for yields above 3%, among stocks that have exhibited bond-like behavior, need look no further than the best-of-breed power utilities, the majority of which are holding the line against torrential wave after wave of equity liquidations. A comparison of the SPDR Utilities ETF (XLU) and the S&P 500 (SPX) during the past two months shows a striking divergence of relative strength.
While shares of XLU have demonstrated extraordinary stability at the $43 level, the S&P 500 has fallen more than 220 points, or 10.5%, in just 12 trading sessions. Sometimes a picture does say a thousand words and the contrast of the washout for the S&P compared to the stand the utilities sector is displaying is meaningful, especially when the dividend yield on shares of XLU is 3.75%.
Even more compelling is that when we dissect the holdings of the SPDR Utilities ETF (XLU), there are a couple of select stocks that stand out. One now is a core holding in the Safe Haven Portfolio of my Cash Machine newsletter. Southern Company (SO) sports a dividend yield of 4.64%, one of the highest in the industry, and operates in nine states with a widely diversified portfolio of power generation that includes natural gas, coal, hydro, wind and solar. Owners of SO aren’t wringing their hands over the bearish blow off, but rather are sitting pretty well with the stock near a 10-month high.
In the words of Mark Cuban, “sometimes the best advice in an enormously volatile market such as the present is to do nothing at all.” The current investing landscape could perpetuate for months to come, and it doesn’t help investors who depend on dividend income to sit in a 100% cash position. The fact that stocks like Southern Company and others in the space have weathered the worst start to any January in stock market history is a testament to the soundness of the sector and those companies that are well positioned from a geographic and demographic standpoint. If you’re singing that Rolling Stones tune “Gimme Shelter,” consider taking a position in Southern Company and paying a visit to Cash Machine to get in on other stormproof dividend stocks.
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In case you missed it, I encourage you to read my e-letter column from last week about another sector that can provide shelter in this market storm. I also invite you to comment in the space provided below.