Defensive Stocks Lose the High Ground

 | Jan 05, 2012 | 3:12 PM EST
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No, I don't think the defensive stocks are "done," as in you should stick a fork in them. I do believe, however, that what made them defensive -- typically, their yields -- has been so diminished by stock-price appreciation that it's harder to make a case for them than at any previous time that I can recall.

Take Consolidated Edison (ED). Until a couple of days ago, this slow-growing company's stock had rallied almost 30% in a year and didn't even yield 4%. That's not nearly the risk-reward you want for a company with minuscule growth.

Frankly, I would rather own Nucor (NUE) or DuPont (DD), yielding 3.5%, or even Eaton (ETN), yielding 3%. I simply don't get the value tradeoff at those prices. It makes more sense to take the risk with NUE than with ED.

But it isn't just ED. Almost all the higher-yielding stocks of 2011 aren't high-yielding anymore -- yet, they have less growth than so many others ahead of them.

That (plus register-ringing and the possibility of actual job growth) makes it necessary for the defensives to come in before they can be bought.

I have preached higher dividends for years. The strategy has worked, but they have to be higher. And lately, after the stunning moves these stocks have made, they don't have the high ground anymore.



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