The power of diversification

In a volatile market like this one, you need to own a blend of cyclical, defensive and dividend stocks.

By Jim Cramer Sep 27, 2011 8:48AM

the streetThe past couple of days demonstrate the value of being diversified. You want to catch a rally, and with a eurozone fix evidently in place there is more room for this one to run. But you don't want to have too much risk on -- meaning you don't want to have only stocks that go up when the economy is strong. You also want companies that have good dividends and companies that do well in a slowdown.


Why do you want all three? Pretty simple: On down days you lose less money, and on up days you do just fine. In a market with a bias to the downside, you have to be worried about both.


So consider a portfolio that holds a good pastiche of all of them, one that has Procter & Gamble (PG) and Johnson & Johnson (JNJ) on the soft side, Eaton (ETN) and DuPont (DD) on the cyclical side and AT&T (T) and Kinder Morgan Energy Partners (KMP) on the utility side.


Last week you would have been crushed by Eaton and DuPont, but eventually they got to or near 4% yield, and the cushion of these accidental high yielders broke the fall. That's why you need yield and cyclicality, not just one.

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Procter and J&J? Johnson & Johnson got downgraded last week by a major brokerage house. It didn't even get grazed. It holds up terrifically. Procter also got downgraded -- not once but twice -- and it held its own. P&G is a best-of-breed company that has underperformed, meaning it hasn't been doing as well as its peers. Sure enough the Financial Times announced Monday that there could be a big restructuring coming that will boost returns.


Of course, you could have gone with the monster winner of General Mills (GIS), which I like so much and which has good yield support. Or you could take advantage of Carl Icahn's exit and buy Clorox (CLX) with an almost 4% yield, knowing that dividend is going up. That's terrific.


Utilities? With the Dow ($INDU) down 6%, they didn't even go down. You could do with it master limited partnerships, and you know I like Kinder Morgan -- it just held in perfectly. Same with Verizon (VZ). Those who want a little more risk can go for an Enterprise Product Partners (EPD) or Boardwalk Pipeline (BWP) or Windstream (WIN).


Now, why not all yield? Because you will not be able to keep up with the averages on up days like this. You will fall behind. Why not all cyclicals? Because there are far fewer up days than down these days, and when we have down days, they are just brutal -- so brutal it is difficult to stay in the game.

Diversification. Yield. Best of breed. The touchstones that allow you to handle even this, the most difficult of markets since the rout of 2008-09.

At the time of publication, Cramer was long DuPont and AT&T, although positions can change at any time.

jim cramer

Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for his charitable trust.

Sep 27, 2011 2:45PM
he inadvertently said something true..............with his yield picks you lose when the market goes down and can't beat the averages when the market goes up ...............which pretty much describes his losing advice
Sep 27, 2011 5:54PM

  Jimmy your diversification is picking four different stocks , five days a week , than selling four different stocks ,five days a week , so in the end you have a hair line that's getting very, very thin.

Go jimmy go , hurt every ear that is still listining to that rick santilli voice of yours   , You and ricky your to peas in a pod . Jimmy the best mouths that cnbc has is, Mary Thompson and Bertha , your wearing of on melissa poor girl

Sep 27, 2011 10:27PM
Hey Jimbo....
I'm a dividend investor through and through.  I don't give a rip about the averages.  Dividend investing is all about a decent yield.  I'm not in a competition with you or the markets.
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