Dividend Payers and Other Hedging Strategies
Dividend paying stocks are usually popular choices for risk-tolerant and risk-adverse investors alike. For the risk-tolerant, dividend yielding stocks can help diversify against loss while providing extra income to boost returns. For the risk-adverse, the same stocks lower overall risk in the portfolio and provide a steady stream of income and returns, instead of chasing big gains and risking equally large losses.
Usually investors think of bonds and treasuries when a conservative portfolio is discussed instead of stocks. And when stocks are included, only dividend yielding ones are screened for. But dividends aren’t the only path conservative investors have when it comes to equities. There are plenty of other stock types to consider when building a defensive or conservative portfolio without having to turn to other assets, like bonds and treasuries.
Don’t count out stocks when it comes to building a defensive portfolio
While dividend payers are a no-brainer for investors that seek hedging strategies or defensive stocks, there are several other things to consider before making a decision. Things like having a large market capitalization, stock buyback programs and sector rotation planning should be included in any portfolio – defensive or not.
Having a large market cap is good for defensively-minded investors, because it usually means that the stock won’t react strongly to market movements. These types of companies tend to be global, making them diversified with their product or service, as well. Both conservative and risk-oriented investors use large cap stocks as portfolio anchors to build the rest of their stock picks around.
Stock buybacks are a great advantage for any investor because they mean the company is helping lift the stock price by generating positive buying activity in the stock. It also means management has shareholders’ best interests in mind and takes an active role in managing the stock price. When a stock starts to fall, having a stock repurchase program can often turn the tide and keep the stock from falling.
Finally, a strategy known as sector rotation can help hedge your portfolio by allowing the business cycle to guide your investments. This cycle is correlated with the economy with certain sectors under-performing or out-performing, depending on where the economy is in the cycle. By avoiding sectors that generally lag and investing in those that do well, you can effectively ride the economic wave and take out some of the guesswork.
Options are often considered separate from stocks in a portfolio, but many option strategies include holding equities as a part of the plan and can be very conservative. Covered calls for example can be a great way to hedge your portfolio if you already own the underlying equity. This allows you to profit upfront, thus lowering your investment base at the cost of selling at a higher price if the stock moves up that high before the expiration date.