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3 Stable Stocks for Conservative Investors

By Jason Hall, Neha Chamaria, and Reuben Gregg Brewer - Updated Oct 31, 2017 at 4:12PM

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If you're looking for stocks that have lower risk of long-term downside losses and offer steady income potential, these three should be on your list.

Stocks are volatile. They can all see their value fall in the short term, and sometimes for no reason related to the stock itself. The good news? Stocks can still make for wonderful investments, even for conservative investors looking for stability. You just have to approach them with the right understanding of what can happen, make sure you're willing to hold through market instability, and count on owning a high-quality business that investors will eventually come back to -- or even flock to -- when the market is uncertain. 

We asked three of our contributing investors to tell us about a stock they like with characteristics that conservative investors looking for stability should consider. They gave us three companies with two important traits: They own assets that serve huge industries and are critically necessary, and generate steady, predictable cash flows. Keep reading to learn why energy-distribution giant Magellan Midstream Partners, L.P. (MMP 1.59%), utility stalwart Consolidated Edison, Inc. (ED 0.64%), and diversified infrastructure asset owner Brookfield Infrastructure Partners L.P. (BIP -0.10%) are stable investments conservative investors should consider. 

Drawing of two lightbulbs separated by a dotted line and an ink pen. The bulb on the left has risk written under it and the one of the right has reward written underneath it.

We think these three stocks offer a solid risk-reward balance for conservative investors.

Owning infrastructure assets is a great risk hedge

Jason Hall (Brookfield Infrastructure Partners L.P.): If you're going to own stocks, you need to accept this reality: Stock prices can fall by double digits in short order, and often for reasons unrelated to the company behind the ticker. But if you're willing to ride out the short-term risks -- particularly by owning high-quality companies you know are safe and stable -- then a company like Brookfield Infrastructure can make for a great, stable investment. 

Shipping containers and cranes at a port.

Image source: Getty Images.

Brookfield Infrastructure's business is owning energy, utility, telecommunications, transportation, and other critically important infrastructure assets. Its assets give it several valuable moats around its business, including high financial and structural barriers to competitive entry, consistent, often inflation-resistant cash flows, and in most cases limited downside risk to economic recessions. The bottom line is the energy, data, water, and goods must continue to flow no matter the economic climate. 

This focus on high-quality, very necessary assets has proved to make Brookfield Infrastructure a solid hedge for investors looking to limit their risk for permanent capital losses while also benefiting from the dividends paid by a high-quality business. That's not to say there's no risk here. Even a wonderful business can see its stock lose value. Brookfield Infrastructure stock fell 30% from mid-2015 through early 2016 but has bounced back in a big way since, with the share price up 40% from the pre-drop high, and up almost double from the low in early 2016. 

The lesson? If you own a high-quality company with a solid dividend, it's easier to ride out the market's volatility. Brookfield Infrastructure is exactly the kind of business conservative investors should build their portfolio around. And trading for less than 10 times trailing funds from operations, it's also a good value today. 

One thing to note: Master limited partnerships like Brookfield Infrastructure (and Magellan below) don't belong in your IRA or 401(K), but they're great to hold in taxable accounts. 

Low debt, growing dividends

Reuben Gregg Brewer (Magellan Midstream Partners, L.P.): There are few things in the investing world more comforting to me than a sizable dividend yield backed by a distribution that goes up every year. That's a key reason Magellan Midstream Partners is a great option for conservative investors looking for stability. Right now, this oil and natural gas midstream partnership offers a 5% distribution yield, more than twice the broader market's yield, backed by 17 consecutive annual increases.    

Magellan's business is largely fee based, which means it can do well in good times and bad so long as demand for oil and gas remains strong. For example, it easily handled the oil price downturn that started in mid-2014 from which oil has yet to fully recover. In fact, distributable cash flow kept rising right through oil's pain. And the distribution never skipped a beat. While many oil drillers were struggling to cover their dividends, Magellan's well-covered distribution increased 33%. That's stability you can take to the bank.  

MMP Chart

MMP data by YCharts

To be fair, Magellan's unit price has been moving sideways for a few years. But there's nothing here to suggest fundamental problems. In fact, Magellan is one of the most conservatively financed pipeline partnerships around. It also has $1.6 billion in growth spending on tap that should allow for 8% distribution increases in each of the next two years. And, if history is any guide, the unit price will eventually start to head higher along with the distribution over time.

Earn double-digit returns with this stock

Neha Chamaria (Consolidated Edison): A conservative investor typically invests in a stock with a high safety factor, or simply one that's least likely to erode capital during downturns. Not surprisingly, a utility like Consolidated Edison makes a good choice.

On a total return basis (capital appreciation + dividends), Con Ed shares have nearly tripled in the past decade. This year, too, the electric and gas utility stock is up nearly 15%, silencing critics who sounded the warning bell on utilities in the wake of rising interest rates. Spice it up with Con Ed's dividend yield of 3.3%, and the returns look even better.

Mind you, Con Ed isn't just any other dividend stock: It is among the handful of companies to have made it to the coveted Dividend Aristocrat group, having increased its dividends for 43 straight years now.

It's easy to understand why Con Ed can generate stable earnings and cash flows. Con Ed's a highly regulated business that sells electricity and gas at decoupled rates, which means its revenue is pre-determined by the regulatory commission regardless of sales volumes. As this policy eliminates fluctuations in its top line, Con Ed can steadily grow its profits and dividends.

Long story short, the defensive nature of Con Ed's business, combined with its strong dividend growth potential and yield, makes it a great stock to own for conservative investors.

Jason Hall owns shares of Brookfield Infrastructure Partners. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Brookfield Infrastructure Partners and Magellan Midstream Partners. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Consolidated Edison, Inc. Stock Quote
Consolidated Edison, Inc.
$99.11 (0.64%) $0.63
Magellan Midstream Partners, L.P. Stock Quote
Magellan Midstream Partners, L.P.
$51.64 (1.59%) $0.81
Brookfield Infrastructure Partners L.P. Stock Quote
Brookfield Infrastructure Partners L.P.
$41.50 (-0.10%) $0.04

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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