This column appeared in the August issue of Money magazine.
In three years since the Great Recession ended, the economy has been running at temps that only a barbecue pit master could love: just hot enough to smoke a bit but nowhere near enough to sizzle. And that's not likely to change anytime soon.
In late June the Federal Reserve was predicting the U.S. economy would grow 1.9% to 2.4% in 2012, and not much faster thereafter. That won't be sufficient to lower unemployment much or bring about the type of equity gains you saw after other downturns, such as in the early '80s.
Remember that stock rally in the first quarter? Fizzled. Volatility is back. And economically sensitive stocks, such as shares of banks and homebuilders which did so well earlier this year, when it seemed as if the rebound was about to heat up are lagging the broad market again.
"This economy can't stand on its own feet yet," says Gene Needles, CEO of American Beacon Advisors. "Investors ought to be happy with 6% to 7% returns." Where can you find such reliable gains?
Dividend-paying staples stocks
Half of your expected gains could come just from the income that shares of food and household-product companies are paying out.
And "no matter how bad the economy is, you're going to still buy toilet paper and toothbrushes," says Lance Roberts, CEO of Streettalk Advisors.
Roberts is considering Procter & Gamble (PG) and Clorox (CLX). Both have trailed the S&P 500 since the rebound, but that was partly due to rising costs owing to high commodity prices brought about by earlier hopes for robust global growth that never materialized. Commodities are now cooling, while payouts at P&G and Clorox keep climbing.
Fast-growing alcohol stocks
Beer and booze sales tend to hold up in sluggish times, says Frederick Reynolds, manager of Reynolds Blue Chip Growth.
He recommends the king of beers, Anheuser-Busch InBev (BUD), and Diageo (DEO), maker of Johnnie Walker. Both sport lower price/earnings ratios than their peers while generating above-average profit growth resulting from their success in the faster-paced emerging markets.
Since U.S. Treasuries have been so volatile lately, debt issued by blue-chip firms with strong balance sheets are a safer way to go, says Scott Armiger, a portfolio manager with Christiana Trust. He recommends Vanguard Short-Term Corporate Bond ETF (VCSH). The fund's 2.3% yield may not crackle, but it's far above what 10-year Treasuries are now paying. In this market, you take the heat you can get.
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