When investors get nervous about the stock market, they generally take one of three common paths with their money. The first choice is the flight to cash, a mistake that many investors made in 2008 and 2009 just in time to miss a massive recovery. The second is the low-risk low-reward move into short-term and intermediate-term bonds. The third move is to roll into defensive stocks that pay solid dividends and can keep paying those dividends even in hard times.

It is the third path that offers investors the most upside or the best current income. It is also the third path that is the most interesting. Defensive stocks rule here, generally in utilities, food and tobacco, and basic consumer products that have to be bought in good times and bad times.

Now comes the big dilemma. Sometimes those safe and steady defensive dividend-paying stocks become incredibly popular. When stocks become too popular, they can also become too expensive. As of Thursday, February 18, 2015, the S&P 500 was valued at roughly 16.2 times the estimated 2016 earnings per share, according to Standard & Poor’s. The cheap/expensive line historically is between 15 and 16, and last week at the selling peak the S&P 500 was valued at 15.8 times forward EPS.

Many defensive stocks have traded at a premium to the broader market for some time. Some of these safe defensive stocks have become very crowded. This is from investors piling in endless amounts of cash so that the share prices have risen and risen. Some of these are even trading above what Wall Street analysts will agree the fair value estimates should be. The S&P 500 is still down for the year, but that isn’t the case in these defensive stocks.

American Water Works

This remains the best-run water company and the best water stock for investors with a long-term outlook. In fact, American Water Works Co. Inc. (NYSE: AWK) is among our own 10 stocks to own for the next decade. That being said, this water utility giant’s stock has started trading with a mega premium to utilities. Its most recent $65.81 share price values the stock at 25 times the expected $2.63 earnings per share (EPS) for 2016 and 23.3 times the expected $2.82 per share for 2017.

American Water is also at a premium to the consensus analyst target price of $63.36, and it has a 52-week trading range of $48.36 to $66.78. American Water Works now has a dividend for new investors of only 2.0%. It seems easy to see why investors are driving up the value largest water utility stock in America. The reality is that American Water Works always trades at a premium price-to-earnings (P/E) ratio versus the market, and it should trade at a premium, but this seems high, even if the long-term trajectory is probably higher rather than lower.
Church & Dwight

Church & Dwight Co. Inc. (NYSE: CHD) is another company that should be recession-proof because of its sector of consumer products. At $89.51 per share and with a $11.7 billion market cap, the stock is less than 1% under a consensus analyst target of $90.00 and just over 1% less than a 52-week high of $90.73. It is valued at 25.5 times expected $3.50 EPS for 2016 and at 23.6 times expected 2017 EPS of $3.78.

The here dividend is almost embarrassingly low at 1.50% — the lowest of the large consumer products companies. This is a great company with brands like Arm & Hammer, Nair, OxiClean, XTRA, Aim, Arrid and Trojan, but paying that much for a great defensive company may just be too much.

Colgate-Palmolive

Closing most recently at $67.22, Colgate-Palmolive Co. (NYSE: CL) has a consensus target price of $68.97. Its 52-week range is $50.84 to $71.56, and it has a $60 billion market cap. What stands out here is that Colgate-Palmolive is valued at 24.4 times expected 2016 EPS of $2.75 and 22.3 times the expected 2017 EPS of $3.01.

Another issue here hard to stomach is that the dividend yield is only 2.26%. That compares to 3.2% for Procter & Gamble and 2.8% from Kimberly-Clark.

TECO Energy

This member of the S&P 500 Utilities Index is an operator in regulated electric and gas utilities. TECO Energy Inc. (NYSE: TE) having a $6.5 billion market cap might not sound like much, but its value is for Tampa Electric and Peoples Gas Systems, as well as an acquisition of Emera in New Mexico. If natural gas is dirt cheap and expected to be that way perhaps forever, then TECO has a great growth in earnings to see.

The problem is the cost of this safety. Its $27.43 share price is valued at 23 times the $1.19 EPS target for 2016 and 21.5 times the $1.27 target for 2017. The stock is two cents shy of a 52-week high and is trading above the consensus analyst price target of $26.51. Its 3.35% dividend yield is also the 11th lowest of the 30 S&P 500 utility stocks.

As of February 18, 2015, the S&P 500 performance so far in 2016 was down year to date by 5.7%. The total returns for each of these four defensive stocks are as follows:

• American Water was up 10.7% since the end of 2015.
• Church & Dwight was up almost 5.9% since the end of 2015.
• Colgate-Palmolive shares were up 1.5% since the end of 2015.
• TECO was up 3.67% since the end of 2015.

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