Get Your Portfolio Into the Bunker

 | Oct 07, 2013 | 12:42 PM EDT  | Comments
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Sure, it's rough out there. We hear whispers of a deal, the market goes higher. We hear intransigence, the market goes lower. How in the heck do you immunize yourself against that?

I think one way to do it is to focus on dividends. Let's puzzle through this. First, I don't think the government is going to stop paying interest on U.S. Treasury bonds. I think it will prioritize and do anything to avoid that default. I also think that the Federal Reserve is in a terrific position to buy all of the debt that's issued, because the central bank hasn't declared that it will taper quantitative easing. The Fed could make a killing on this debt, because it doesn't care about the yield. Of course, there will come a time when the government will either have to issue debt or default, but I am hearing this won't happen until the end of the month.

Despite the seeming lack of concern right now about the debt, and given the orderly rise in bonds and decline in yield, it seems like everything's hunky dory. Remember, though, that there are actual owners of debt who aren't going to be as calm. They are going to be furious -- and that's particularly so for foreign debt-holders. The Chinese, for example, are said to own about $1.2 trillion of U.S. debt. Why would you ever own U.S. debt if you thought you weren't going to be paid? That would be insane. So it is likely that they will become sellers.

However, if we don't pay our debt, or if we prioritize and only pay our debt, then the gross domestic product will collapse. So you have this ironic situation. On the one hand, you would want to buy Treasuries because you would have to presume we'd be going into a very serious depression that would cut in favor of U.S. bonds on a flight to safety. Yet you would also have sellers, especially from overseas, because Treasury would be unsafe.

So what the heck could work in that crazy universe? How about stocks with good yields and rising dividends? You have to figure that stocks would get totally clocked on a default, or as we get closer to the default deadline -- or, worse, the day after the deadline. So you are talking about bounce-back candidates.

The first thing I would do is buy the stocks of utilities for which I am not concerned that the earnings risk is very high. That means you should buy Dominion (D). Why Dominion? Because, just this week, we heard on "Mad Money" that this 3.6% yielder is doing incredibly well.

First, it is going to spin off a master limited partnership, which is terrific and will bring in a lot of cash. Second, business itself allows for the continued increase in dividends. Finally, it is building a remarkable liquefied natural gas export plant that is well ahead of every other LNG facility on the books -- with the possible exception of the Cheniere export plant, because both plants were at one-time LNG import facilities. So they are simply reverse-engineering plants that had already been permitted, had the docks ready and have been hooked into pipe.

Dominion CEO Tom Farrell has already pre-sold the LNG, so the risk here is very small. A growth utility may be a terrific place to be as the deadline comes close, or even if it gets passed.

I would also consider the common stock of another serial raiser: ConEd (ED). Why this one? Simple: It is not a generator of energy. It is a purveyor of energy. That's a nice augmenting of Dominion, which has some coal exposure -- something that ConEd has none of. ConEd is a play on the conversion of oil to natural gas, and it has a ready supply of natural gas to a city that has tremendous growth, and won't be all that affected by a crisis, because the economy is more international than many realize.

Finally, I think we will get a chance to buy Southern (SO), which is already at about 5% yield and has an amazingly long-term history of paying that dividend through the toughest times imaginable. I have interviewed Southern several times, and I truly think this company gets the sanctity of the dividend better than just any utility. I like the fact that Dave Peltier, who is the portfolio manager for The Street's Dividend Stock Advisor, has selected Southern. That portfolio has beaten the Dow Jones Dividend Index by sporting stocks that have consistently raised their dividends -- which is exactly the opposite, obviously, of what bond-issuers can do.

I have three others that Peltier and I agree on that are worth buying in the event of a debt default or the plummeting I expect ahead of such an event -- one that is being described as impossible by both sides, and is often talked about as if it's as unlikely as a meteor hitting the Capitol building.

The first is Pfizer (PFE). This is about as plain-vanilla a drug company as you can get. Normally I would select Bristol-Myers (BMY), but that stock is up on a spike. I might have gone with Eli Lilly (LLY), but I didn't like what I heard about the pipeline at last week's analyst meeting. Merck's (MRK) got yield and a share buyback, but it does not have the pipeline that many want. That's why Pfizer would seem to be such a natural. Pfizer continues to churn out earnings, and it remains committed to raising its dividend. The company is also so proactive that it actually split off its Zoetis (ZTS) animal-health division in order to bring out value. I like that.

Second is Campbell Soup (CPB). Here's a company that simply won't go away. It is a serial dividend-raiser, and I think that the company lives in constant fear of takeover bid, as its business looks a lot like the business of Heinz, which got a takeover bid earlier this year from none other than a team that included Berkshire Hathaway (BRK.A/BRK.B). There's nothing more consistent than soups and snacks.

Finally, the last Peltier-blessed stock: Altria (MO). Look, I know that there's tremendous controversy and resistance involved in buying tobacco stocks, but this is a company that keeps taking share and keeps raising its dividend every August. Talk about a constant! The company behind Marlboro is a clockwork dividend-raiser.

Pfizer, Campbells and Altira: Two 3-percenters and a 5-percenter, all with growth prospects. Terrific Washington antidotes.

You know what else will get clocked? The telco stocks. The Dividend Stock Advisor likes AT&T (T), but I could see some earnings risk coming down the pike from a recession. I want a company that has a terrific wireless business, because wireless growth continues unabated. I want Verizon (VZ), which just purchased the rest of Verizon Wireless that it doesn't own from Vodafone (VOD).

Now, I know it took down a ton of debt. But the cash flow is there, and the interest rate is so low that I don't doubt for one minute that Verizon will change its policy of boosting its dividend. If I can get this one at a 5% yield, which is not far from the current level, I think it'll be a steal.

Finally, I want some exposure to healthcare real estate investment trusts, especially ones for which people believe there is a ton of exposure to Medicare, but where there really isn't. I want Ventas (VTR), which is run by the redoubtable Debra Cafaro. With a tremendous wind at its back, the aging of baby boomers and a remarkable performance record and dividend history, I think that this 4.3%-yielder can be had right at these levels, as it is already down 3%.

Of course, leave some room, as with all of these, because the market will break down for certain as we get closer to the deadline or go over it. But dividends will give these stocks a real floor.

Dominion, ConEd, Southern, Pfizer, Campbell's Soup, Altria, Verizon and Ventas: companies that have both terrific records on boosting payouts and terrific recession-proof growth. It's just what you might need as we approach -- and, yes, go over -- the deadline and the government scrambles to raise cash in an attempt to avoid defaulting on bonds, but will most likely have to cut out so much spending that the economy slips rather rapidly into a recession.

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