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All-Weather ETFs for a Challenging Stock Market

September 05, 2019

The US stock market remains volatile. Whether it’s the daily mania or depression over ongoing trade negotiations between the US and China or other economic challenges, you need to make sure that your stock portfolio is set up to deal with risk while still generating growth and income.

The US economy remains a haven as most of the major economies of the world are slowing or are headed into recession. US Gross Domestic Product (GDP) remains firmly in the positive.

And inflation remains low in the US. The Federal Reserve Bank’s preferred gauge of inflation—the core Personal Consumption Expenditures Index (PCE)—is running at a scant 1.58%.

So, the underpinnings of the US economy remain positive, and consumers are very much engaged and comfortable to keep spending. Businesses are also optimistic.

But that didn’t stop volatility from spiking dramatically over the past month and into September.

Despite the volatility, however, the stocks inside the model portfolios of my Profitable Investing advisory have avoided the whiplash and kept the gains chugging along all year.

Where to Go for Growth & Dividends

There are specific segments that continue to deliver even in these wild times.

What each of these segments have in common is that they are exclusively or predominantly focused on the US economy and markets, and each has a proven history of sustained and well-defended dividend flows.

One of the best defensive segments remains the real estate investment trusts (REITs).

REITs continue to fare well in both good and challenging times. The underlying security of their real assets, which generate ample income to fuel dividend distributions, remains a compelling case for investors.

And thanks to the Tax Cuts & Jobs Act of 2017, REIT dividends come with a 20% tax deduction, making their yields even more attractive.

Over the past five years, REITs have returned 56.01% for an average annual equivalent return of 9.30%, as tracked by the Bloomberg US REITs Index.

Bloomberg US REITs Total Return Index—Source: Bloomberg Finance, L.P.

The Vanguard Real Estate ETF (VNQ) is actually outpacing the Bloomberg REIT Index year to date, with a return of 27.02% and a dividend yield of 3.55%.

US utilities also continue to benefit from lower inflation and interest rates, which reduce their funding costs while also making their dividend yields all the more valuable. And since most utility dividends are qualified, the income tax liability is lower for investors in most tax brackets.

Utilities also come with the benefit of regulated rates and profit margins for their general regulated operations. This provides certainty for both good and challenging economic times. And with the US economy remaining in growth mode, demand for many essential services is on the ascent.

In addition, many utilities also run extra non-regulated wholesale businesses ranging from wholesale power distribution and/or transmission to natural gas sales and transmission. This adds to the revenues that will fuel dividends as well as additional growth.

Over the past five years, US utilities, as tracked by the S&P 500 Utilities Index, have returned 74.44% for an average annual equivalent return of 11.77%.

S&P 500 Utilities Total Return Index—Source: Bloomberg Finance, L.P.

Vanguard has an excellent exchange-traded fund (ETF) in this market with its Vanguard Utilities ETF (VPU). It has kept up and even bettered the market over the past five years. Year to date, it has returned 20.65% and sports a dividend yield of 2.80%.

Another one of the traditional defensive market segments is the consumer staples sector. This is because consumers and households continue spend on the necessities of life regardless of good or bad times.

However, that concept got severely challenged in 2018 as many traditional leaders in this market ran into a buzz saw of changing consumer tastes for packaged and branded goods, while costs rose and squeezed margins.

Many are still challenged, but the segment has many successful turnaround stories, including Mondelez International (MDLZ), Procter & Gamble (PG), Colgate-Palmolive (CL) and even General Mills (GIS).

The market segment overall has generated a return over the past five years of 54.48% for an average annual equivalent return of 9.08%, as tracked by the S&P 500 Consumer Staples Index.

S&P 500 Consumer Staples Total Return Index—Source: Bloomberg Finance, L.P.

Vanguard has a well-run ETF in this segment as well with its Vanguard Consumer Staples ETF (VDC). It has largely kept up with the index. Year to date, the ETF has generated a return of 20.92%, with a dividend yield of 2.65%.

And like for the utility stocks, most consumer goods stocks are tax-advantaged with qualified dividends.

All My Best,

Neil George
Editor, Dividend Digest & Profitable Investing

PS—If you’d like to receive further guidance on the market sectors that are performing well even amid increased volatility, be sure to check out my Profitable Investing advisory for more of my market research and recommendations for safer growth and bigger, more reliable income.