Sign in
Become a MarketWatch member today
Mark Hulbert Archives | Email alerts
July 26, 2011, 12:01 a.m. EDT
By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) "” How do you hedge against the unthinkable?
In discussions more numerous than I can count over the three decades I have been publishing the Hulbert Financial Digest, the possibility of a U.S. government default was almost always dismissed in the same fashion: Don't worry about it. If the world comes to an end, your portfolio's net worth won't matter anyway.
Well, here we are contemplating just such a default, and that dismissal suddenly appears to be profoundly unhelpful. A U.S. government default has become a not-insignificant possibility, and yet the world is not coming to an end. Investors want to know what they can do with their portfolios to immunize themselves against that possibility.
President Obama urges Congress to raise the nation's debt ceiling. As the Aug. 2 deadline to reach a compromise looms, David Wessel says we're one day closer to watching the American political system drive the car over the edge of a cliff.
The two most commonly suggested hedges, at least among the advisers I track, are gold and Swiss francs. And both make a lot of sense "” for a portion of your portfolio. But many other advisers also worry that each of these hedges could be vulnerable if default is averted "” since it is not unlikely in that event that they will suffer big losses, at least over the short term.
There's a third category of investments that is not getting much attention: The common stocks of dividend-paying blue-chip companies. This inattention is curious, since such companies presumably would provide a good hedge in the event of a default, and yet "” at the same time "” provide excellent upside potential even if default is averted.
Consider what these companies would provide in the event of a default:
Many of such companies would immediately have a higher rating than the U.S. Treasury. In effect, they could become the financial arena's safe haven.
Such companies are often well diversified across many different economies and currencies. More than two-thirds of Coca Cola's sales come from outside the U.S., for example. If the dollar were to plunge in the wake of a default, their non-dollar-denominated assets would be worth a lot more in U.S. dollar terms.
Such companies often have turned a profit through long histories of both thick and thin, and it's a good bet that they will continue to do so. Take Wal-Mart , for instance: Do you really think people will stop shopping in the event of a government default? You could even argue that the number of people who shop there will increase.
At the same time, these companies' stocks would be attractive in the event the U.S. government does not default. Many have dividend yields that are equal to, or even better than, five- or ten-year Treasurys, for example, which certainly makes short-term volatility more tolerable.
The investment adviser I monitor whose approach comes closest to focusing on the kind of stock discussed here is Kelley Wright, editor of Investment Quality Trends. His watch list, from which he chooses the ones to put in his model portfolio, is constructed to include companies that satisfy exacting criteria, such as having an S&P Quality ranking in the "A" category, 25 years of uninterrupted dividends, increased dividends in at least five of the last 12 years, and improved earnings in at least seven of the last 12 years.
Wright's approach has an excellent long-term record. Over the last 10 years, according to the Hulbert Financial Digest, it has produced a 7.2% annualized return, vs. 3.7% for buying and holding the market itself.
Wright's model portfolio currently contains more than 50 such stocks. The ones I list below are those to which S&P gives an "A+" Quality ranking:
Coca Cola /quotes/zigman/222647/quotes/nls/ko KO -0.67% , 2.8% yield
Colgate-Palmolive /quotes/zigman/222734/quotes/nls/cl CL -0.96% , 2.7% yield
Johnson & Johnson /quotes/zigman/230812/quotes/nls/jnj JNJ -0.70% , 3.4% yield
Omnicom Group /quotes/zigman/237213/quotes/nls/omc OMC -1.46% , 2.1% yield
Procter & Gamble /quotes/zigman/238894/quotes/nls/pg PG -1.46% , 3.4% yield
Sysco Corp /quotes/zigman/242525/quotes/nls/syy SYY -0.96% , 3.4% yield
Target Corp /quotes/zigman/253872/quotes/nls/tgt TGT -1.29% , 2.6% yield
TJX Companies /quotes/zigman/243683/quotes/nls/tjx TJX -1.53% , 1.5% yield
United Technologies /quotes/zigman/244482/quotes/nls/utx UTX -0.43% , 1.2% yield
Wal-Mart Stores /quotes/zigman/245476/quotes/nls/wmt WMT -1.01% , 2.8% yield
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD... Expand
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now. Collapse
Tech Tales
Why Groupon wants its coupons to expire
The Economist's Corner
The Fed should twist again
Behavioral Economics
Pity the Super Rich, miserable lost souls
Writing on the Wall
Mortgages for dummies
Marder on Markets
Demand for stock still a concern
On the Markets
Stocks as safe haven in event of default
Read Full Article »