Buy National Grid plc, Severn Trent plc, 3i Infrastructure plc & GCP Infrastructure Investments Limited to protect against volatility?
With just over a week to go until the EU referendum, investors should prepare themselves for higher volatility in the stock markets. Cash is perhaps the perfect hedge against potential losses when market volatility rises, but unfortunately, interest rates are very low.
Instead, investors should consider buying low volatility, defensive dividend-paying shares. A well-diversified portfolio of such shares should provide investors with steady income no matter what the referendum result may be. So, for those that need to put some money to work, the following four stocks might be worth a closer look.
National Grid(LSE: NG) is probably the most defensive stock in the FTSE 100 index. With a beta of just 0.32, a 1% drop in the stock market index historically only leads to an average decline in the value of National Grid's shares of just 0.32%.
Unlike most other energy utility companies, National Grid is largely immune to volatility in energy usage and commodity prices, making the firm incredibly non-cyclical. The gas and electricity transmission company is a natural monopoly, meaning it has virtually no competitors, and earns "rent-like" returns year after year.
The stock isn't cheap though, with shares trading at 15.4 times forward earnings. However, the stock has an attractive dividend, and management has pledged to raise the dividend by at least RPI inflation each year "for the foreseeable future".
National Grid currently yields 4.5%, and city analysts expect its prospective dividend yield will rise to 4.6% this year, and 4.7% in 2017.
Staying with the utilities sector, Severn Trent(LSE: SVT) is another safe pick. Like National Grid, Severn Trent is a natural monopoly too. This means it has great cash flow visibility and low earnings volatility. Utility stocks are not known for producing massive gains, but if what you're after is steady returns, then they should not disappoint.
Given Severn Trent's recent strong earnings trend, I expect its shares to continue to outperform in the short term. Ofwat's new 5-year regulatory regime does not seem to hurt profits as much as expected. In fact, Severn Trent's full-year pre-tax profits actually rose 4.4% to £313.6m, as it benefited particularly well from new incentives to reduce leakages and improve customer service, which earned it a net real reward of £23.2m.
Severn Trent pays an annual dividend of 80.7p per share and yields 3.7% today. Of course, the payout isn't risk free - the dividend has just been cut by 5%. But historic cuts have always tended to be modest, and the stock is certainly on the conservative end of the spectrum.
3i Infrastructure's (LSE: 3IN) global diversification helps to insulate it from downturns in any single market. The infrastructure investment company invests in a diversified portfolio of infrastructure companies and seeks to provide shareholders with a total return of 8-10% per annum.
Historically, 3i Infrastructure has a strong track record, with an average total return of 11.7% over the past 5 years. The infrastructure company currently yields 4.2% from its dividend of 7.25p per share. And 3i has pledged to pay 7.55p per share for the coming year, giving it a prospective yield of 4.4%.
Hedge against inflation
GCP Infrastructure Investments (LSE: GCP) invests primarily in UK infrastructure debt, which is secured against long-dated public sector-backed cash flows. As a buyer of debt, as opposed to equity, GCP is like a less risky version of 3i Infrastructure. And since a significant proportion of assets is inflation-linked, the fund is a good hedge against inflation too.
At a share price of 119p, the shares currently yield 6.4%.
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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.