The stock market has dropped recently, and so have so-called defensive stocks. That unusual move makes the group look more like a buying opportunity.
Defensive stocks—those producing goods and services people will buy regardless of the health of the economy—usually rise in that kind of environment. But that hasn’t been the case recently. It isn’t concern about earnings that is hurting stocks: The attractiveness of these companies’ dividends has been the problem as yields on Treasury bonds have increased. The yield on 10-year Treasury debt is up to around 4.4% from a bit under 4% over the summer. Forward dividend yields on staples stocks are about 3%, while utilities yield just under 4%.Still, the selling is likely to moderate soon.
The staples fund trades at about 19.1 times earnings, a roughly 5% premium to the market, but it can trade at a more than 20% premium when those stocks are in favor.
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