When the House of Representatives agreed to a three month debt limit extension the market rallied. Why? How is delaying the hard work making things better? The sad thing is that we have lots of big problems today that no one seems to want to touch. Investors need to use a safety first approach to at least a portion of their portfolios because, someday, our elected officials won’t be able to kick the can anymore.
Some Big Problems
The debt limit is a big problem, but it’s really just symptomatic of the bigger issue. The United States is a debtor nation in a big way. This can’t change overnight and there are only a few ways out of the mess, that some suggest will plunge us into a Japanese style malaise. That nation, with its huge debt load, has been mired in a go-nowhere economy for 20 years.
However, the debt load is only one issue. There are others. Medical care is a massive one that we’ve only just begun to deal with. To his credit, president Obama at least forced a discussion of healthcare. Of course many people disagree with his approach and the current law will likely change a lot over time. That said, there isn’t a clear solution and the troubles of Medicare and Medicaid, two big programs, aren’t fully addressed by the law.
Then, of course, there’s Social Security. The so-called third rail of politics has gotten many a legislator in trouble, including President George W. Bush. He quickly dropped the topic. However, the rob Peter to pay Paul methodology of Social Security is about to crumble as the baby boomers enter retirement and there simply aren’t enough workers to keep paying out as much as we now do.
Kicking the Can
It feels a little like Rome is burning, or at least smoldering, and Nero is playing the fiddle. Only this time, it’s not just one person getting ready to play, there are hundreds of politicians at the ready with their various instruments. Why? Because all we seem to do is kick the can down the road again and again and again.
These problems can’t be solved by delaying a solution. Delay only makes things worse. Investors need to be ready for the day when the market wakes up to this fact and starts heading south. When it does, it could head south in a big way. This means that at least a portion of your portfolio should be in mega-cap companies with long histories of solid performance and, importantly, annually increased dividend payments. A few to consider are:
Johnson & Johnson (NYSE:JNJ)
Johnson & Johnson is one of the most diversified healthcare companies in the world, with operations in the pharmaceutical, medical device, and consumer products spaces. It is a leader in each area. Although healthcare is in flux in this country, JNJ is well positioned to meet the increasing demands that will be placed on the system by the aging of the baby boomers. Moreover, with its diversified portfolio of products, it will easily survive some areas performing poorly because others will, invariably, be doing well. It is also a serial acquirer, which means that economic troubles could open up acquisition opportunities. With a solid financial foundation, a long history of annual dividend increases, and a good position in an area of increasing importance, JNJ is a great option for conservative portfolios, particularly with a recent yield of over 3%.
McDonald’s Corporation (NYSE:MCD)
McDonald’s is the undisputed leader in the fast food industry. Its history of innovation and expansion are second to none. While a decade or more ago it floundered a little, the company righted the ship and has since performed at the top of its game. A recent slip in same store sales sent the shares lower, but that should only be temporary. One nice thing about McDonald’s is that economic problem won’t likely stop people from eating out, but it will send them on a search for value. McDonald’s definitely offers value. For investors, it also offers exposure to exciting foreign markets that appear to have years of growth ahead of them. That’s a nice bonus and provides important diversification. With a solid business, a long history of annual dividend increases, and a recent yield over 3%, this, too, is a good safety first option.
PepsiCo, Inc. (NYSE:PEP)
PepsiCo is the world leader in salty snacks and a strong number two in soda. With a recent yield around 3%, it should interest investors seeking a safe haven. Coca-Cola (K) would be a viable alternative, but it doesn’t have the same diversification as it only sells drinks. PepsiCo is a solid company with an impressive history of annual dividend increases. However, the nice thing about the company’s products, both snacks and drinks, is that people view them as acceptable indulgences. Sales will go down if there is an economic slowdown, but the company is in no danger of going out of business. Moreover, like McDonald’s, PepsiCo is expanding overseas, providing an additional level of diversification to its business.
The Procter & Gamble Company (NYSE:PG)
Procter & Gamble is a brand powerhouse, selling everything from batteries to laundry detergent, and a whole lot in-between. Its brands tend to be higher end, which exposes it more than some of its competitors to economic weakness. That’s a negative, but the company’s financial strength and massive size give it a lot of wiggle room to switch things up. It is also one of the most research driven consumer product companies around, creating not only new products but also entirely new categories of products. A recent yield over 3% makes this perennial dividend increaser well worth your consideration. And, it is moving into foreign markets where it sees the potential for increasing demand. Some missteps in this effort have taken a toll on performance lately, but when you are as large as P&G, you can afford to make a few mistakes and keep going.
Wal-Mart Stores, Inc. (NYSE:WMT)
Wal-Mart is the king of cheap. While it gets low marks for store its experience and frequently gets accused of treating its employees poorly, its low prices keep people coming in the doors. Of course low prices alone aren’t enough, which is where Wal-Mart really shines. It is so large that it can, and often does, get major pricing concessions from its suppliers. This allows the store to sell good quality products at some of the lowest prices around. If there’s any kind of economic problem, people still need to buy the things they need. Doing so at the cheapest prices possible should be a boon to Wal-Mart’s already strong sales profile. Like the others on the list, the company is expanding abroad. So, with a recent yield of around 2.3% it isn’t the most enticing on the dividend front, despite a long history of dividend increases. However, it is one of the best run retailers and it will likely benefit from financial weakness, making it worth the price of admission.
You can’t sit on the sidelines in the investing world, particularly if you are trying to live off of your dividends. So there are risks that have to be taken. Still, the United States has a number of really big problems. Putting at least a portion of your portfolio into “safety first” names can help you sleep better at night while you watch our can kicking politicians avoid doing the heavy lifting they should be doing. The above names are all great options.
The article Politicians Kick The Can, Investors Should Focus On Safety originally appeared on Fool.com and is written by Reuben Gregg Brewer.
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