It’s perfectly natural to worry about your investments — I know I do about mine! This can be exacerbated when the FTSE, or any other market, wobbles, or there’s economic issues to contend with.
Let me share two defensive picks I reckon investors with a lower appetite for risk should take a look at.
These are National Grid (LSE: NG.) and Tesco (LSE: TSCO).
Essential energy
We haven’t had much of summer here in the UK. The recent news of energy prices soon going up isn’t what consumers wanted to hear to further compound matters.
The traditional utility providers may be getting some stick. However, the owner and operator of the electricity grid looks like a good investment, to me at least.
From a defensive standpoint, no matter the economic outlook, we all need power. National Grid helps keep the lights on. This ability can help keep earnings stable, and returns flowing too.
Speaking of returns, a dividend yield of over 6% is attractive, though it is worth remembering that dividends are never guaranteed. In fact, National Grid recently cut its dividend in half to invest in maintenance of the grid, and future growth.
This is one of the risks involved when it comes to National Grid. A large, key piece of infrastructure is expensive to maintain and manage. Plus, the additional cost of green initiatives in the future could impact earnings and returns.
However, I think the pros outweigh the cons due to the defensive nature of the firm. As a bonus, the dividend cut and market volatility has led to a better entry point at present. The shares trade on a price-to-earnings ratio of just 10.
Filling our bellies
People need to consume food to live and thrive. So it makes sense that one of the biggest supermarkets around is another defensive option out there. The essential nature of the goods Tesco sells makes it one of the best defensive picks on the index, in my view at least.
Tesco is actually the largest supermarket in the UK by market share. This currently stands at over 27%. For context, the closest competitor is Sainsbury’s with 15%, and Asda comes in third at 12%. This dominant position gives it a competitive advantage.
From a bearish view, it’s worth noting that supermarket disruptors Aldi and Lidl have carved out their own success since entering the UK market. Both continue to aggressively open new locations. I can’t help thinking established incumbents like Tesco need to watch their backs. Aldi now comes in fourth place based on market share, with 10%. Earnings and returns could come under pressure if this assault continues.
However, Tesco’s fundamentals look good to me. The shares trade on a price-to-earnings ratio of 14. They aren’t the cheapest. However, I’d personally have no qualms paying a fair price for a quality business like Tesco. Finally, a dividend yield of 3.5% sweetens the investment case.
