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The Least Dangerous Stocks in the Dow

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The stock market has seen huge amounts of volatility so far this year, with a big advance in the first four months of the year entirely wiped out by the May swoon and last Friday's plunge. Clearly, stocks still have a lot of risk, and with so many uncertainties about what's happening around the world -- from an unstable Europe to a slowing China and a job-poor U.S. -- you can expect to see some wild swings for some time to come.

As the stock market starts looking more like a roller-coaster ride, many investors look for stocks that will shelter them from the worst of the market's turbulence. To help you identify some good prospects, I'd like to take a closer look at the 30 stocks of the Dow Jones Industrial Average (INDEX: ^DJI  ) and see how they compare on one measure of how resistant they may be to further declines in the Dow.

The secret to portfolio stability
Yesterday, this article on high-volatility stocks identified some of the most dangerous stocks in the Dow. By looking at a risk assessment statistic called beta, you can see how certain stocks react to overall market moves. Because beta measures volatility compared to the overall stock market, it tells you whether a stock tends to move more or less violently than broad market indexes. The highest betas belong to stocks that have seen the most turbulence.

Today, though, we're looking at Dow stocks with some of the lowest beta values in recent years. Let's take a closer look at these relatively calm stocks to try to learn why they've done such a good job of holding steady during big market swings.

Wal-Mart (NYSE: WMT  )
Wal-Mart had the lowest five-year beta in the Dow, at just 0.35. But anyone who's tracked the stock over that timeframe knows just how comfortable it was holding Wal-Mart even during the worst of the financial crisis.

Recessions tend to hurt nearly every stock, but Wal-Mart was well-positioned to thrive in tough times precisely because it attracted cost-conscious, cash-starved customers. With its low-price mantra, Wal-Mart captured new shoppers during the recession and actually managed to post very strong gains in the big bear market year of 2008. If you think we're headed back into a slowing economy, then Wal-Mart's recent push to new multiyear highs makes plenty of sense -- and the company could thrive once more.

McDonald's (NYSE: MCD  )
The fast-food giant is another stock with similar characteristics to Wal-Mart. Price-conscious diners moved down from more expensive casual restaurants in favor of McDonald's offerings, and McDonald's answered with a push toward more varied fare, such as its McCafe line of coffee drinks.

McDonald's does have significant exposure to emerging markets, and so any weakness overseas could well hit the global fast-food leader quite hard. 2008 was also a winning year for McDonald's stock, and if anything, the company is better poised to deal with a slowdown now than it was four years ago. With its beta of 0.47, you can expect a smoother ride from McDonald's than from the overall market.

Procter & Gamble (NYSE: PG  )
P&G is the classic example of the defensive stock: a consumer-products giant with a strong brand selling goods that people need day in and day out. Such companies typically don't outperform during bull markets because they're not set up to grow as quickly as more cyclical businesses. But bear markets are when P&G and its peers shine.

That's not to say Procter & Gamble doesn't have its challenges. High commodity prices have squeezed margins somewhat in recent years. But in a slowdown, you could expect those prices to reverse course and fall -- a move that could actually lead to even better profits for P&G compared with other Dow stocks.

Don't get tricked
With these three stocks, five-year and one-year beta values matched up pretty well. But the No. 4 stock on the five-year list, ExxonMobil (NYSE: XOM  ) , shows the danger of relying too much on beta. Since 2007, Exxon's beta was 0.51, reflecting the extent to which the company moved in line with oil prices rather than the overall stock market. But in the past year, the stock has gotten more volatile than the market, with a beta reading of 1.03. Given how quickly energy prices have come down in anticipation of slower global growth, it's hard to trust Exxon to provide a smooth ride if the market stays turbulent.

Stay safe
As Exxon shows, beta isn't a fail-safe indicator, as it only looks at what a stock has done rather than what it may do in the future. But stocks that have shown signs of behaving well in past bear markets have attractive traits that could serve shareholders well in the next bear market.

Another solution is to focus on healthy dividend-paying stocks. Let me invite you to the Fool's special report on dividends. Inside, you'll find the names of nine stocks to help you secure your future. It's free, so get your copy today!

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. You can follow him on Twitter, @DanCaplinger. Motley Fool newsletter services have recommended buying shares of McDonald's and Procter & Gamble, as well as creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

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Related Tickers

10/21/2016 4:47 PM
^DJI $18145.71 Down -16.64 -0.09%
MCD $113.93 Up +3.36 +3.04%
McDonald's CAPS Rating: ***
PG $84.33 Down -0.60 -0.71%
Procter and Gamble CAPS Rating: ****
WMT $68.34 Down -0.39 -0.57%
Wal-Mart Stores CAPS Rating: ***
XOM $86.62 Down -0.59 -0.68%
ExxonMobil CAPS Rating: ****