It’s been recently touted by the Bank of England (BoE) that we could soon experience a stock market correction. That will have some investors panicking. But, in my opinion, there’s no need.
Firstly, it’s a correction, not a crash. The correction the BoE’s predicting will see the market plunge about 10%. For it to be considered a crash, it would have to fall by 20%, or more.
Secondly, not only would it open some brilliant buying opportunities for those who’ve a long-term outlook, but there are ways investors can mitigate their portfolios against feeling the full brunt of a correction.
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Defensive stocks
One way is to own defensive stocks, which is something I’m trying to do more of. That’s why I recently opened a position in consumer goods giant Unilever.
Defensive stocks can bring stability during times of volatility. They’re businesses that can generate reliable cash flow, even during economic downturns. This is because they often provide essential goods and services that people require regardless of external factors such as the health of the economy.
There’s an abundance of these sorts of companies on the FTSE 100. But I’ve got my eye on one in particular.
A solid option
I reckon Tesco (LSE: TSCO) could be a solid option and one for investors to consider buying today. It’s a stock I’ve been tracking and I’d love to add it to my portfolio today, if I had the cash.
Year to date, its share price is up 7.9%. Over the last 12 months, it’s risen 26.6%. By comparison, the Footsie’s up 5.9% and 10.5% across the same timeframes.
The supermarket giant is defensive by nature. After all, the food and drinks it sells are a human necessity. Tesco reported a 7.4% rise in group sales last year to £61.5bn despite choppy economic conditions, highlighting its strength.
On top of that, I think its shares look decent value at the moment. They trade on a price-to-earnings ratio of 12.8. That’s slightly higher than the FTSE 100 average (11). Nevertheless, I’m okay with paying a slight premium for a company of Tesco’s quality.
The largest risk is competition. The rise of budget rivals such as Aldi in the last decade or so has been impressive. With its low prices, it poses a real threat to the likes of Tesco. Last year it reached 10.1% market share, the first ever time it’s broken into double digits.
The top dog
But Tesco remains the top dog with a 27.4% share of the market. And that leading position gives it a competitive edge over its rivals.
Alongside its dominant market position, there’s also the income the stock provides. It sports a 3.8% yield, above the FTSE 100 average. Its dividend payment increased by 11% last year to 12.1p per share. In April, the firm also committed to buying back £1bn worth of shares by April 2025.
While dividends are never guaranteed, the business has a solid track record of increasing its payout. It’s grown at a compound annual growth rate of just over 10% in the last five years.
I think Tesco could bring some much-needed stability to my portfolio during any potential downturn. So I want to open a position sooner rather than later.
