3 Stocks That Can Help You Fed-Proof Your Portfolio

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On a recent trip to our nation’s capital, I talked to a lot of people about the Federal Reserve. And I heard the same concerns voiced over and over: that the Fed’s plan to lower inflation at all costs will ultimately send us right into a recession.

I don’t have a prophetic vision of exactly how this will all pan out, but I do know that if the Fed is dead set on raising interest rates until inflation is under control, you need the kind of stocks that can not only survive but thrive during economic uncertainty. So, in other words, now is the time to Fed-proof your portfolio. Here’s how to do it.

Fed-Proofing Your Portfolio

To put this plan into action, look for stocks with strong cash flow, low (or at least manageable) debt, and pricing power. You’ll find many of these stocks in the consumer services, health care, and natural resource (energy and materials) sectors. And select technology stocks may also make the cut.

It’s relatively easy to find companies with high cash flow and low debt, but pricing power takes a little more digging. Companies with pricing power have consistent sales and profit growth — results that don’t fluctuate too much, especially to the downside, even in a slow or no-growth environment. These are stocks with relatively high and reliable profit margins.

One of the best shortcuts to finding them is by using the TradeSmith Screener tool to search for stocks that meet two basic criteria:

1. They are top cash-flow generators.
   
   One of our exclusive TradeSmith Baskets is Top Cash-Flow Generators, which you can include in a simple stock screen. It scans the market for stocks that have the highest free cash flow (FCF).
   
   This measure of profitability is a truer measure of a company’s core profitability than earnings. It reveals the actual cash a company is generating after paying off all its operating expenses and capital investment costs.
2. They offer you a solid dividend yield AND consistent dividend growth.
   
   You want stocks that offer a dividend yield greater than the overall market AND reliable growth in cash dividends paid. That way, you get paid while you wait for upside appreciation in the stock. And this is cash income that steadily grows over time.
   
   Again, our cutting-edge database comes to the rescue here. One of our most popular Ideas by TradeSmith strategiesis Dividend Growers. It screens for healthy stocks with a dividend yield of at least 2%. Plus, they must have consistently grown their dividend payout over the past five years.

When I ran this strategy through our TradeSmith Screener tool recently, I came up with a select list of 28 high-quality, dividend-paying stocks that generate strong cash flow. There were plenty of health care, energy, consumer, and financial stocks represented.

Here are three examples.

Exxon Mobil Corp. (XOM): This energy giant certainly has pricing power, given its dominant position in the business and especially given such high recent oil prices. XOM generates monster free cash flow of $20.9 billion and offers a generous 3.74% dividend yield. And even though it’s in a cyclical business, XOM has grown its dividend for the past 39 years.

Merck & Co. Inc. (MRK): When it comes to pricing power, it doesn’t get much better than this blue-chip pharma giant. MRK has a wide moat thanks to its broad portfolio of patented medications. That translates into strong pricing power. Plus, MRK generates $9.66 billion in annual free cash flow and pays out a substantial 3.03% dividend yield.

Coca-Cola Co. (KO): This longtime Warren Buffett holding also has a long and cherished track record of paying and growing its dividend. In fact, it’s one of the elite Dividend Kings, with 60 consecutive years of dividend increases; its current yield is 2.74%. The key to Coke’s success is consistent growth in sales and cash flow, plus an enviably high operating profit margin of 28.6%!

All three of these leading stocks are both recession-proof and inflation-resistant, offering ways to Fed-proof your portfolio.


With XOM, we know people are going to keep filling up their gas tanks.

With MRK, we know people are going to keep taking their medications.

With KO, we know folks will keep filling up their shopping carts with cases of Coke.

So, no matter what the Fed throws at us next, Exxon Mobil, Merck, and Coke are stocks that can thrive and offer protection in any economic scenario. They are Fed-proof stocks! And if you’re not doing so already, I highly recommend using our powerful TradeSmith stock screening tools to discover more ways to Fed-proof your investments.