McDonald's and other large brand-name companies have been known to keep people financially fed during sickly markets. From January 1, 2011, to the beginning of October, the fast-food chain's stock has gone up about 13 per cent, while the S&P 500, the benchmark that most stocks are measured against, has fallen seven per cent in that same time period.
Here are five reasons why McDonald's does a portfolio good.
1. McDonald's is global
McDonald's and other companies such as Coca-Cola, Procter & Gamble and IBM are large conglomerates with operations in multiple countries. Just because one market suffers doesn't mean they all will.
2. McDonald's sells stuff people need
You can argue whether one really needs a Big Mac, but the fact is, the companies that do best in a downturn are those that offer goods that people will buy regardless of economic conditions. Fast, cheap comfort food, like what McDonald's sells, will never go out of style. Telecoms or utilities are also good bets because most people will cut out almost everything else before they give up their TV and electricity.
3. People buy safe stocks like McDonald's first
When the market is in trouble, most people sell their risky investments and flock to large, stable companies like McDonald's. While big companies will still experience losses if the market crashes, they'll fall less because, in most cases, it's these stocks that people hang on to for the long term.
4. McDonald's pays income
Many large companies pay a dividend, a quarterly or annual payment based on the amount of shares a person holds. In struggling markets, it's these dividends that can help get investors through the tough times. Many people reinvest these payments or use them to pay the bills. Every company has a different yield, but McDonald's pays a not-too-shabby 3.21 per cent a year.
5. McDonald's is exposed to emerging markets
Don't expect huge growth from large companies like McDonald's -- it's not some young start-up introducing a revolutionary product. But investors can still get some growth from these companies, especially if they have operations in emerging markets like China and India, where the middle class is getting richer and starting to demand Western-style goods. In many of these cities, there's not yet a McDonald's on every corner.
For investors looking to protect their portfolios in a downturn, it's a good idea to look at McDonald's and other large companies. You don't have to eat the food to still be lovin' it.