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With so many stocks in the market trading near all-time highs, it is natural to worry about the increased potential for a market crash. While betting on a crash is almost always a fool’s errand, it does make sense to have a game plan in place if one happens. As a general rule, market crashes spare almost no one, so the trick is to make sure your stocks go down the least.
Stock market crashes will usually create knock-on effects in the broader economy. If investors lose a good chunk of their portfolios, they are probably not going to be in the mood to spend money on anything. That will lead to a decrease in consumer spending. A drop in consumer spending will negatively affect the gross domestic product, creating a recessionary effect. In response, the Federal Reserve will probably cut interest rates (or perhaps increase the money supply) to stabilize the economy.
Knowing all these occurrences are likely to happen, you can plan ahead and scope out stocks that are best suited to manage these certainties. Here are three names that would be wise choices to buy in the event that a crash occurs.
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1. STORE Capital: A REIT focusing on businesses with defensive characteristics
STORE Capital(NASDAQ: STOR) is a real estate investment trust (REIT) that specializes in single-tenant properties with longer-term leases. Services account for about 65% of STORE’s tenants, followed by retail and manufacturing. The services segment includes restaurants, health clubs, education, and auto repair. While consumers might cut down on dining out in the event of a crash, it will take a sustained market crash before they start canceling their gym memberships or skimp on car maintenance.
The biggest retail tenant for STORE is Fleet Farm, which is a large general store that is concentrated in the Upper Midwest. The store most closely resembles Sears back in the day when it sold everything from tools to apparel to lawn/garden stuff. Most of Fleet Farm’s offerings are non-discretionary goods, making the stores relatively immune to a stock market crash. Aside from its defensive qualities, STORE pays a hefty dividend yield of 4.5%. Investors’ interest in that income should provide some protection against a significant stock price drop.
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2. AGNC Investment: This REIT benefits from a flight-to-safety
AGNC Investment(NASDAQ: AGNC) is a mortgage REIT specializing in mortgage-backed securities, which are guaranteed by the U.S. Government. While STORE Capital is the more typical REIT, investing in property and charging rent, AGNC looks more like a bank. It buys mortgage-backed securities and collects interest. If the stock market crashes, it usually has knock-on effects in the credit markets as well. This means that corporate debt often falls as investors swap out riskier assets with safer ones.
In the event of a market crash, the Federal Reserve has historically intervened in the market by purchasing Treasuries and mortgage-backed securities to drive down borrowing costs. AGNC’s portfolio of government-guaranteed mortgage-backed securities is almost identical to the securities the Fed buys in the market. That buying will support the valuation of AGNC’s investment portfolio. AGNC is another high-yielding REIT, and it pays a monthly dividend. At current levels, the dividend on this stock yields 9%.
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3. Proctor & Gamble: Maintaining a venerable portfolio of defensive names
Proctor & Gamble(NYSE: PG) is another company that screams “defensive stock.” P&G’s brands are textbook examples of defensive products, with shampoos, soaps, razor blades, laundry detergent, toothpaste, and diapers. These consumer staple products will be almost completely insensitive to fluctuations in the overall economy. In addition, Proctor & Gamble is highly diversified internationally, so it will be less affected by a U.S. stock market crash than most other companies. P&G is not a REIT, so it won’t have the same sort of yield as AGNC Investment or STORE Capital; however, it still pays a healthy dividend yield of 2.4%.
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Brent Nyitray, CFA has no positions in the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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