Stock Up on Defensive Investments

 | Sep 25, 2013 | 10:00 AM EDT
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I've spent much of this year writing about the growth opportunities available in technology and I will write about that in the future. I started the year out discussing defensive investing and it continues to be a staple of my overall strategy, especially for income creation.

The most boring sector for defensive investing for income is the grocers, which I've been writing about periodically for the past few years. In February, I discussed Wal-Mart (WMT), Kroger (KR) and Safeway (SWY). Since then, Wal-Mart shares have increased 9%, from about $70 to $76. Kroger is up about 42%, from about $29 to $41, and Safeway is also up about 42%, from $23 to $32.50.

The impact of the rising stock prices for Kroger and Safeway has also caused their dividend yield to decline. Since February the yield on Kroger has declined from about 2.2% to about 1.6%, and for Safeway the decline has been from about 3.4% to 2.5%.

One of the prime drivers of the shift into these stocks has been the migration from bonds to conservative income producing stocks. The important point is that investors have been selling bonds and these stocks have been the beneficiary of this reallocation by those investors seeking secure income.

The increase in the stock prices for Kroger and Safeway are not indicative of some newly discovered growth formula for this sector or by these companies. Although the investors that have shifted into them may acclimate to income from stocks vs. bonds, it is more likely that these investors view these stocks as a temporary place holders for their money while the volatility in the bond market remains high.

I do not expect to see a return to bonds anytime in the near future, however. Many investors have been caught unaware by the abrupt rise in long-end Treasury yields over the past six months. This has caused the mark-to-market accounting of their bond holdings to reflect a steep decline in the value of their portfolio as it is listed on their account statements.

Last month, I wrote that the rise in Treasury yields, the fastest in history, has caught many borrowers and bond investors off guard. Both of these groups are trying to figure out what to do next. For bond investors, the result will most likely be for a flight from bonds to what are perceived as conservative income producing stocks. Kroger, Safeway, and Walmart fit that bill.

However, now that the dividend yield on all three is below the yield on the 10-year Treasury note, the potential income gain that existed earlier this year by shifting from bonds to stocks is now gone.

The rate of appreciation in the price of these stocks has, as a result, largely run its course. It should decline to something closer to its long-run average near the general rate of inflation as measured by the consumer price index (CPI).



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