Financial crisis boosts demand for defensive stocks

Castle wallsThe financial crisis has increased demand for defensive stocks, such as Vodafone and GlaxoSmithKline, which can offer constant dividends and stable earnings.

Half of the top ten companies by market value in the FTSE 100 at the end of August were defensive stocks, compared with two in September 2007, prior to the run on UK bank Northern Rock.

The defensive names, which include British American Tobacco, Diageo and AstraZeneca, have displaced mining companies and banks, which made up six of the top ten FTSE stocks in 2007. These sectors have just one company each in the top ten today.

Michael Clark, portfolio manager at Fidelity Worldwide Investment, which published the analysis, said defensive stocks would perform better than cyclical companies.

“Companies less sensitive to the economy will continue to deliver decent returns, whereas more cyclical sectors are likely to struggle as it is clear that the global economy has slowed down,” he said.

Dividend-paying stocks are attractive because interest rates and bond yields are low, said Edward Perks, director of core/hybrid portfolio management at Franklin Templeton’s equity group.

“There are some very high quality companies that have dividend yields higher than the yield available on those same companies’ long-term debt – something we do not typically see,” he said.

Data from Empirical Research Partners shows that between 1970 and June 2012, dividend-paying stocks returned an average of 14.1% a year, while stocks as a whole returned 12.1%, with more volatility.

“The yield available on equities through dividend payments is very attractive in this environment and is durable over the long term,” said Nick Lyster, chief executive of Principal Global Investors, which has launched a fund focusing on dividend-paying stocks, the Edge Equity Income Fund.

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