We all like big gains. Although there are exceptions, many wins often come at the expense of high volatility that simply isn't suited for risk-averse investors and retirees looking for stable returns. However, there are some dividend stocks that have a track record of generating shareholder value over the long term -- and doing so in a way that lets you rest easy at night.
Procter & Gamble (PG 0.28%), United Parcel Service (UPS 0.22%), and NextEra Energy (NEE -0.27%) are three industry-leading blue chip companies. Investing in all three stocks equally would give you a roughly 2% dividend yield as well. Here's what makes this low volatility income basket a great buy for 2022.
Procter & Gamble
Procter & Gamble (P&G) stock has been one of the most seldom discussed success stories of 2021. The stock closed at an all-time high on Tuesday, which is impressive considering we're in a climate where smaller growth stocks and even large-cap names are well off their highs, and many are near 52-week lows. Procter & Gamble may not offer explosive gains and can even underperform a raging bull market. But what it lacks in star power it makes up for with consistency.
P&G tends to deliver steady organic growth from its business no matter what is happening in the broader economy. Brand recognition, the benefits of scale, and a cohesive strategy give the company pricing power that helps it raise prices and grow market share. These advantages come in the nick of time during a period of high inflation or even a recession.
Unsurprisingly, P&G delivered another impressive performance in fiscal year 2021, growing organic sales by 6% and core earnings per share (EPS) by 11%, and raising its dividend by 10%. It is also a Dividend King, having raised its annual payout for 65 consecutive years. There are few companies that embody the concept of "slow and steady wins the race" better than Procter & Gamble.
Although demand for UPS's domestic, international, and supply chain solution services may ebb and flow with the broader economy, it remains positioned for growth well into the future. UPS's e-commerce business is improving; its international segment is on fire; and its adjusted operating margin is now consistently above 10%.
UPS operates in a capital-intensive market with limited competitors. Like patrons of P&G's business, UPS consumers are price-sensitive, but they also tend to go for the option with the best all-around value. UPS's performance proves there's strong demand from residential customers and businesses of all sizes for its services. The company is on track to finish 2021 with record-high revenue and operating profit.
UPS plans to raise prices in 2022 by around 5.9% to combat higher supply-chain and labor costs. Investors should watch to see how a sizable price increase affects demand. If consumers absorb the costs, then UPS will prove it has yet another lever it can pull to boost growth beyond expanding routes and offering more services.
NextEra Energy subsidiary, Florida Power & Light, is the largest utility in Florida. Coming from a background in natural gas, NextEra has made sizable investments into solar and wind over the last several years as it evolves into a lower emission, sustainable company. Although the strategic shift has been expensive, NextEra believes the investments will help it generate consistent earnings and dividend growth for decades to come.
The company's project backlog is rich with developments, meaning NextEra is still in the heart of growth mode. "Fast-growing" and "utility" are two words that usually don't go together. But NextEra's unique approach has been rewarded by public markets. Its stock closed at an all-time high on Dec.13 and has produced a total return of a staggering 250% over the last five years, which is exactly double what the S&P 500 has done over that same time frame.
A brief look at volatility
The following chart summarizes why these three companies -- in addition to their underlying strength -- are also low-volatility stocks.
Thirty-day rolling volatility is a forward-looking financial metric that takes the standard deviation of the last 30 daily percentage changes in a stock's total return price and multiples it by the square root of 252, which is the number of trading days in a year. Put another way, it takes recent trading data and extrapolates it to a year-long time frame to provide a leading indicator of what a stock's volatility could be over the next year.
By comparison, a maximum drawdown is a historical financial metric that gives the highest peak-to-trough swing in a stock price over a given time frame. This means that the maximum amount you could have lost buying P&G stock at its high and then selling it at its low over the last three years, excluding dividends, would have been 23%, which is only slightly worse than gold (which has vastly underperformed P&G during that same time frame).
Sit back and relax
P&G, UPS, and NextEra Energy are three different businesses. But they all share core underlying characteristics that make them great long-term buys for investors who don't like volatility. P&G is the second largest consumer staple stock by market cap; UPS is the largest industrial stock by market cap; and NextEra is the largest utility stock by market cap.
As we've seen with the rise and fall of past titans like IBM or Compaq, size certainly isn't everything. P&G, UPS, and NextEra Energy are far from slowing down and look to be well positioned to grow much bigger in the coming decades. P&G benefits from a growing population looking for high-quality and affordable essentials; UPS benefits from a growing demand for quick and trustworthy shipping, as well as from e-commerce and other trends; NextEra is making massive investments into growing its renewable energy capacity. Investors looking to fortify their portfolios with a basket of safe income stocks could consider P&G, UPS, and NextEra Energy in 2022 and beyond.