3 top stocks for tough times ahead: National Grid plc, Direct Line Insurance Group plc and Royal Mail plc

With the EU referendum now less than two weeks away, many investors are understandably feeling rather nervous. Of course, that’s not the only reason, since US interest rate rises could be just around the corner and investor fears may be heightened by the prospect of a new US President later in the year. This adds up to what could be a tough period for the stock market.

In such a scenario, investors may wish to seek out companies that offer relatively robust outlooks. Certainly, no company is completely immune to a downturn, but some businesses may function better than others during such a period and be able to offer high yields and stable outlooks.

Go direct

One such company is Direct Line (LSE: DLG). Certainly, the insurance sector isn’t a hugely defensive space, but Direct Line offers a wide margin of safety and a high yield. Evidence of its margin of safety can be seen in the company’s price-to-earnings (P/E) ratio of 12.5, which indicates that its shares are underpriced at the present time. That’s especially the case since Direct Line has grown its bottom line in each of the last three years and is forecast to continue this trend in both of the next two years.

Furthermore, Direct Line also has a yield of 6.3%, which is over 50% higher than the yield of the FTSE 100. This could provide a useful income during a downturn and allow the company’s investors to not only improve on their total return, but also take advantage of low market valuations through which to top up their holdings.

Stability play

Also offering a relatively high yield is National Grid (LSE: NG). While its yield of 4.5% is much lower than that of Direct Line, it’s likely to be more resilient and safer during a challenging period. That’s because National Grid’s operations are less affected by uncertainty regarding the macroeconomic outlook than is the case for the vast majority of its index peers.

And with this being the case, National Grid could offer significantly superior share price performance during a downturn as investors flock towards companies that are perceived as being relatively robust and stable during uncertain times.  

In addition, National Grid has risen by 83% in the last seven years which shows that its shares can perform well during a bull market as well as during more challenging periods for the FTSE 100.

Room to grow

Meanwhile, Royal Mail (LSE: RMG) remains a sound buy during an uncertain period for the wider market. That’s at least partly because it’s geographically diversified, with its European operations in particular performing well. And with Royal Mail having a beta of just 0.8, it’s likely to offer a less volatile shareholder experience than the wider index in the short run too.

Due to Royal Mail trading on a P/E ratio of 12.7, it seems to have a wide margin of safety. This should limit its downside risk in the coming months and with it having a yield of 4.3% from a dividend that’s covered 1.8 times by profit, Royal Mail looks set to remain popular during what’s likely to be a low-interest-rate environment. This has the potential to push its shares higher after their 20% year-to-date rise.

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Peter Stephens owns shares of Direct Line Insurance, National Grid, and Royal Mail. 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.