With Brexit negotiations set to commence shortly, there is a good chance of increased uncertainty for investors. After all, the UK’s leaving the EU is an unprecedented event that could cause investors to adopt an increasingly risk-averse attitude. In addition, inflation is moving higher and political risk in the US remains elevated. As such, buying shares with strong dividend prospects as well as defensive characteristics could be a shrewd move.
A reliable performer
Imperial Brands (LSE: IMB) is arguably one of the most defensive shares in the FTSE 100. The tobacco industry offers exceptionally resilient demand that bears little correlation to the performance of the wider economy. As one of the most staple of consumer goods, tobacco sales are likely to remain high, regardless of how any of the challenges facing the FTSE 100 turn out. Tobacco companies have significant pricing power, which should allow for rising revenue and higher profitability in future.
As well as a defensive business model, Imperial Brands also offers a less volatile shareholder experience. It has a beta of 0.6, which indicates that its shares will move by 0.6% for every 1% move in the wider index. If the FTSE 100 experiences a difficult period, the company’s share price could therefore offer a degree of support. And since tobacco companies have historically been the subject of a ‘flight to safety’ during recessions, Imperial Brands could even rise in a falling market.
In addition to its defensive characteristics, the company also offers strong income potential. It has a yield of 4.5% from a dividend that is covered 1.6 times by profit. This indicates there is scope for dividend growth ahead of not only inflation, but profit growth, too.
Geographical diversity
While alcoholic beverage companies do not offer the same degree of defensive characteristics as their tobacco counterparts, Diageo (LSE: DGE) could prove to be a worthwhile investment. It could perform well in a falling market that has been hurt by the effects of Brexit and uncertainty in the US. That’s because it is well-diversified from both a geographic and product standpoint, which should equate to resilient growth in the long run.
Diageo has invested heavily in its exposure to emerging markets such as China and India. While this has entailed significant challenges in the short run, it means it is less reliant upon the US and Europe than is the case for many of its index peers. Not only could this mean improved defensive characteristics, it could also allow the company to access higher growth rates across the emerging world.
Although Diageo currently yields just 2.7%, its dividend is covered a healthy 1.7 times by profit. And since earnings are due to rise by 18% this year and 9% next year, there seems to be scope for a rapid rise in shareholder payouts over the medium term. With a beta of 0.6, Diageo also offers a less volatile shareholder experience. This could prove to be a major asset in the coming months if the FTSE 100 comes under pressure.
