The stock market is within striking distance of its all-time high, but the fallout from the COVID-19 pandemic is far from over.
Instead of chasing higher valuations, risk-averse investors may consider shifting to low-risk positions in stocks with solid dividend yields. Here are three great stocks for low-risk investors.
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Procter & Gamble
The Procter & Gamble Company (PG -0.16%) is the quintessential consumer staple stock. Consumer staple stocks are a go-to investment during a recession because demand tends to stay strong despite the market cycle. People still need household products like Tide detergent or Crest toothpaste, even during tough times.
But the market is very aware of the strength of P&G, so the stock tends to trade at a premium. However, its premium is arguably justified given its track record, size, and dividend strength.
With a market capitalization of nearly $300 billion, P&G is one of the largest consumer staple stocks. During the Great Recession, Procter & Gamble's stock price remained relatively stable and finished down less than 5% between the beginning of 2007 and the end of 2008. The company has also had 56 consecutive years of dividend growth, solidifying its status as one of the premier Dividend Aristocrats. The stock currently yields 2.7%.
Waste Management
Like P&G, there will always be a baseline amount of demand for Waste Management's (WM 0.59%) services. Waste Management has the largest network of collection, transportation, and disposal services in the United States.
Stay-at-home orders and self-quarantines will likely contribute to growth in the company's residential and recycling businesses, but its commercial and industrial sectors could take a hit as production slows and many businesses are still operating at a fraction of what they were doing before the pandemic.
Waste Management isn't immune to economic cycles, but it is a good company for low-risk investors. Unlike other industrial stocks that tend to boom and bust with the economy, Waste Management's business has enjoyed a steady increase in net income and cash flow over the years, all the while raising its dividend for 17 consecutive years. The company has already approved another 6% dividend raise in 2020 and yields 2% at the time of this writing.
Enbridge
As the largest oil and gas midstream company in North America, Enbridge's (ENB 1.49%) claim to fame is its steady and reliable cash flow, 98% of which comes from agreements that have stability written into them. Although an energy stock like Enbridge is arguably riskier than Procter & Gamble or Waste Management due to commodity price risks and geopolitical risks, it offers a good risk/reward profile for income investors fishing for opportunities in oil and gas.
Enbridge functions with reliability similar to a utility. Its cash flow is well in excess of its dividend obligation, which means its dividend -- which is currently yielding 7% -- has stability. In fact, the company's first-quarter distributable cash flow (DCF) -- the amount of cash eligible to give to shareholders in the form of dividends -- was $1.34 per share and more than double its dividend payment of $0.574. Enbridge expects full-year 2020 DCF to be about double its annual dividend of $2.30.
Although Enbridge is protected from many short-term risks thanks to its predictable revenue streams, the company is exposed to long-term declines in commodity prices and demand. As a precaution, Enbridge has increased its liquidity by $5 billion to $14 billion, reduced 2020 costs by $300 million, sold $400 million in assets, and deferred 2020 growth capital spend by $1 billion. The company expects to fund its 2020 growth with about half debt and half cash flow.
Enbridge seems well positioned to generate another year of strong cash flow and reward investors with an attractive dividend yield.
PG Dividend data by YCharts
Like Procter & Gamble and Waste Management, Enbridge has a strong history of raising its dividend, having done so over the past 10 years.
A low-risk basket
Procter & Gamble, Waste Management, and Enbridge are three stocks that do a great job of rounding out a portfolio. There's really never a bad time to own them, but with the market almost as high as it was before the pandemic, now could be a particularly good time for low-risk investors to pick up a few shares.
