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Protect Against Pullback: Non-Cyclicals With Strong Dividends

Posted: Jun 22, 2009 10:29 AM by Peter Cherewyk

Tickers in this Article: STSI, SJM, MO, RAI, PM, HNZ

When taking a look at the S&P 500 over the last three and a half months, we see a huge jump, and the S&P has only started to slow in the last two weeks. The S&P has been flat since June 1, and has even seen major resistance to the 200-day exponential moving average since June of 2008. As you can see in the chart below, there have been major pullbacks every time the S&P gets close to the 200-day EMA, specifically in May of 2008 and August of 2008, and it's just bounced off the average this month. (Learn more in Moving Average Bounce.)

S&P500, 200day EMA

Figure 1: The S&P500 200 Day EMA

Source: Metastock

If you want to start protecting part of your portfolio against a pullback, large non-cyclicals or dividends might be the answer. Given their nature, non-cyclicals will not be affected as much in a down or up market. Finding a couple with decent dividends would be a bonus.

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Food Plays
HJ Heinz is a classic play on a product that can't be substituted. The company has been meeting or beating estimates in the last four quarters, and has a 4.5% dividend yield that looks sustainable. There's also The JM Smucker's Company, which is a $5.5 billion company with a huge pop this week. This could be a little over heated in the short term, but long-term thinkers will want to consider this stock. For the three months ending April 30, 2009, earnings per share (EPS) are up 19% to 80 cents, and revenues increased over 80% from $590 million to $1.07 billion on a comparable period basis. Dividends yield 3% and sit at 35 cents per share, up from 32 cents last year.

Company Dividend Yield

HJ Heinz (NYSE:HNZ) 4.6%

The JM Smucker's Company (NYSE:SJM) 3%

Reynolds America (NYSE:RAI) 9.1%

Phillip Morris International(NYSE:PM) 5.1%

Altria Group (NYSE:MO) 7.8%

Up in Smoke?
Tobacco stocks might be hurt in the short term due to the recent bill passed to restrict the advertising of products. Don't expect a continued slump as this is nothing new to the demonized industry. Recently, Reynolds came out on top of a $1 billion dollar patent-infringement case with Star Scientific (Nasdaq:STSI), which put positive pressure on RAI.

Bottom Line
This sideways market with a potential dip could be suggesting that investors seek a little more protection. High dividend-yielding stocks sitting in industries that fair well through recessions can provide that protection.

By Peter Cherewyk

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