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After several years of topsy-turvy markets, some investors would do just about anything to get a smoother ride for their portfolios. Yet as attractive as it may be to turn solely to high-quality stocks that haven't seen as much volatility as the overall market, it leaves you without the overall exposure that most people need in order to reach their long-term financial goals.

Scouting out safe stocks
Traditionally, investors have looked to stocks to provide the growth they need in their portfolios. Although many stocks generated some income, it typically paled in comparison to what you'd find from fixed-income focused investments like bonds and bank CDs. But the extended period of low interest rates has turned that wisdom upside down, and now, many dividend stocks yield far more than you can get from bonds. That in turn has contributed to the popularity of Vanguard High Dividend Yield ETF (NYSE: VYM  ) and the huge number of other dividend-oriented stock ETFs.

The yield advantage that stocks currently have has in turn transformed the expectations that many investors have for stocks. In particular, income investors are used to the idea that they should get most or all of their returns on an investment from its yield, rather than looking for big capital gains. So they might not want stocks that jump all over the place, preferring instead ones that would hold their value.

Over the weekend, Barron's took a look at a Bespoke Investment Group list of the least volatile S&P 500 stocks over the past 10 years. The list produced some stalwart companies, including the following:

  • Several utilities made the list. Consolidated Edison (NYSE: ED  ) , for instance, yields more than 4% and serves the New York City metropolitan area with electricity and natural gas. Progress Energy and SCANA have similar businesses delivering necessary services to customers.
  • Consumer giants Coca-Cola (NYSE: KO  ) , Johnson & Johnson (NYSE: JNJ  ) , and Kimberly-Clark also made the cut. Coca-Cola's emerging market growth has been impressive, but in many ways, the stock has only been playing catch-up after climbing to lofty valuations in the late 1990s. Meanwhile, J&J had healthy growth in the early part of the decade but saw revenue stagnate when the recession hit, and has since faced challenges of multiple product recalls.
  • One standout on the list is Waste Management (NYSE: WM  ) , whose trash disposal and recycling services help both customers and businesses. Similar in some ways to a utility, however, the company pays a dividend near 4%, while having long-term growth potential tempered by weak municipal budgets that threaten its sales.

The right move?
Treating dividend stocks as if they were bond alternatives can be extremely dangerous. For one thing, as Fool analyst Morgan Housel points out, if you're just buying now, you're late to the party. Many dividend stocks, including ConEd, have gotten bid up through the roof lately as investors seek income at any cost.

But an even bigger mistake is to think of nonvolatile stocks as the perfect stock portfolio for general purposes. Admittedly, dividends make up a substantial part of total return for many of the best-performing stocks in the market, including many of the names on Bespoke's list. But if you give up on small-cap stocks just because they're more volatile, you'll miss out on potentially much better returns -- returns that could make a huge difference in your future standard of living.

Furthermore, don't make the mistake of assuming that just because these stocks weren't volatile over the past 10 years there's any guarantee they won't erupt with volatility in the next decade. Utilities in particular have benefited from rock-bottom natural gas prices, but if that trend reverses, it could spell big trouble. Even huge companies like Coke and J&J depend on their brand names to help them navigate changing customer trends -- and sometimes they move in the wrong direction.

Be careful
Sure, if you're tired of seeing your account balance bounce around, the idea of calmer investments sounds perfect. But as hard as it is to deal with, volatility is your best recipe for finding the gains you need to fit with your long-term investing horizon. The right answer is to find a mix of stocks, including both risky growth-oriented names as well as stalwarts like those on Bespoke's list, and then combine it with other assets that will help you meet your income needs in a diversified, safe way.

If you're retired or trying to save for retirement, stocks are an essential part of your success. But reaching your retirement goals will require more work than just investing in the best income-producing investments around. Our newest special free report highlights the shocking truth about your retirement. Don't miss this chance to grab your free copy of this can't-miss report today!

Fool contributor Dan Caplinger doesn't keep all his eggs in one basket. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Coca-Cola, Waste Management, and Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson, Kimberly-Clark, Coca-Cola, and Waste Management, as well as writing a covered strangle position in Waste Management and creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy gives you everything you need.


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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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Related Tickers

12/19/2014 3:52 PM
ED $65.63 Up +0.07 +0.10%
Consolidated Ediso… CAPS Rating: ****
JNJ $106.25 Down -0.56 -0.52%
Johnson & Johnson CAPS Rating: *****
KO $41.97 Down -0.42 -0.99%
Coca-Cola CAPS Rating: ****
WM $50.76 Down -0.10 -0.20%
Waste Management CAPS Rating: *****

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