When stock markets go awry, high yield stocks tend to outperform the broader market. The high-yielding dividend stocks that perform best in a downturn are so-called defensive ones. These are stocks in companies that provide goods and services always needed throughout the business cycle, enabling them to generate stable profits year after year.
Here are three high-yield stocks that could protect your portfolio in a bear market.
GlaxoSmithKline (LSE: GSK) may be a controversial pick given its poor earnings trend. But as healthcare needs are continually rising, GSK remains a big growth opportunity. And despite recent weak results, it maintains a strong competitive position and has robust free cash flow generation.
Early signs of recovery are also beginning to show, with quarterly sales figures highlighting strong growth from its new pharmaceutical products, especially its new respiratory drug line-up including recently launched Breo, Anoro and Incruse. New products account for just £2bn in annual sales, but with continued sales growth and additional launches, sales could rise to £6bn by 2018.
Meanwhile, investors are being handsomely rewarded for their patience, with shares in the pharma giant currently yielding 5.5%. There’s one major short-term negative: with the dividend being frozen at 80p per share for 2016 and 2017, there’s no dividend growth for at least two years.
Pearson (LSE: PSON) is going through a rough patch, reporting a 2% drop in adjusted operating profits in 2015 and management giving a weak set of guidance figures for 2016. Adjusted operating profits are expected to come between £580m and £620m in 2016, which at the mid-point implies a decline of 13% on the previous year.
There are causes for optimism though. Pearson‘s competitive position is strong, and cyclical and policy factors are mainly to blame for recent weakness. This included a buoyant employment market in the US, which meant reduced college enrolment, and policy changes in the UK that lowered demand for its vocational course services.
The outlook in the longer term remains attractive. Pearson has significant exposure to growing markets in Brazil, China, India and South Africa, where it’s launching new products such as the New Student Experience. Its transition from print to digital would also likely be positive to its competitive position, given the advantage scale has on digital platforms.
With an annual dividend of 52p per share, Pearson yields 6%.
Investor confidence in G4S (LSE: GFS) is near an all-time low, with the company seemingly embroiled in an endless list of controversies, ranging from overcharging of government contracts, human rights violations and abuse at a young offenders centre. But the company is still set to deliver strong underlying growth in revenues and earnings.
G4S remains global market leader in security services and against the backdrop of global economic uncertainty, demand for its services remains robust. In 2015, it secured new contract sales worth £2.4bn with retention rates near 90%. This shows the company has little trouble in winning new contracts even after recent scandals.
City analysts expect underlying EPS will grow 5.6% this year, to 15.2p per share. For 2017, earnings should climb another 9%, to 16.6p. This would put the shares on an attractive forward P/E of 12.2 and 11.2, respectively.
The stock’s 5.1% yield isn’t as big, but there’s potential for faster future dividend growth, given that earnings growth is set to accelerate.
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Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.