With a long road of investing ahead of me, I have to admit that I sometimes crave volatility. Volatility drives emotions, and emotional investing allows some of my favorite stocks to be driven down to incredibly delectable valuations. I tend to do most of my purchasing when times are volatile and sit back and relax when volatility wanes.
For the majority of you reading this, I'm going to bet that you're in the opposite camp. After two major swoons over the past 11 years, the last thing most investors want to see is an uptick in volatility. With that being said, I thought I would set out with the task of putting together yet another set-it-and-forget-it portfolio that represented various sectors, but would offer clearly less volatility than the overall market.
The marker I use to measure a stock's volatility is its beta. The beta simply measures how volatile a stock is in relation to the S&P 500 with 1 being a neutral indication. Anything below 1 indicates that, over the past three years, a stock has tended to be less volatile than the S&P 500. Anything over 1 indicates more volatility. Thus a beta of 2 is four times more "volatile" on average than a beta of 0.5.
For my research, I stuck to the following metrics:
- Beta less than or equal to 0.5.
- Dividend yield equal to or greater than 3%.
The thing to remember is that when the market is running higher, a low-beta portfolio will normally underperform the market. Therefore, it's important to have dividend income in your pocket to replace the income you might have gained if you were willing to take on greater investing risk.
Here are five companies that I chose based on diversity of sector, yield, beta and overall value. Below, I'll discuss why they make the cut:
Source: Motley Fool CAPS Screener, data as of close March 16, 2012.
The fab five
The tobacco sector is well-known for its healthy dividends, which is why Lorillard makes the cut. Following slightly lower cigarette volume from Altria and word from Reynolds American that it would be reducing its workforce by 10% over the next three years, it's encouraging to see Lorillard's cigarette volume increasing for both its flagship Newport brand and its discount brands. Being able to pass along price increases is important for Lorillard, and nothing so far suggest it's having any issues in that department. While there are legal hurdles it will continue to endure, it offers investors a good mix of growth, stability, and dividend income.
Merck is one of the few pharmaceutical companies that looks like it will avoid falling headfirst off the patent cliff. Although it isn't out of the woods -- it's set to lose patent exclusivity on its best-selling asthma treatment, Singulair, this year -- Merck offers exposure to the fast-growing health-care sector for a reasonable price. Perhaps the reason it strikes my fancy is because so many of its competitors are failing miserably. Forest Laboratories could lose three-quarters of its pipeline to generic competition in the next few years, while GlaxoSmithKline and AstraZeneca are also facing sizable generic competition. Merck's low-beta and 4.4% yield will be greatly appreciated by long-term investors.
Seriously, who doesn't love a good can of warm soup on a cold day? Campbell's will give you exposure to the consumer goods and food sectors without the wild volatility you'd get if you invested in the coffee sector, for example. With a wide variety of products, Campbell's isn't going to crater just because one or two of its input costs rise. The company has proven capable in the past of being able to pass along rising prices to its consumers, which has translated into relatively stable dividend increases. Campbell's won't turn any heads with its five-year growth rate of just 3.3%, but that slow-but-steady growth also tends to keep emotional investors out of the stock. Long-term investors, does a 3.5% yield sound delectable to you?
TC Pipelines may sound familiar because I recently highlighted it last Friday as a great dividend stock you could buy right now. The company, which transports natural gas through 5,550 miles of pipeline, offers you the ability to take advantage of the constant and rising demand for energy without dealing with the emotional swings of directly buying natural gas. TC Pipelines has increased its dividend for the past 12 years and offers a yield that has averaged a full 3% better than its industry peers over the past five years. The secret to TC's success is its long-term contracts, which give it added flexibility and keep its investors content. With a yield approaching 7%, TC offers the right balance of dividend income and stability.
You say you want technology and telecommunications all rolled up into one? Well, that's precisely what AT&T is there for. You could just as easily substitute Verizon here as well, but I slightly prefer AT&T for its marginally higher yield and cheaper forward earnings multiple. AT&T has its fingers in everything from fiber optics to old-school landlines which makes its cash flow from operations very predictable – and predictable is a great thing if you're not a fan of volatility. AT&T offers one of the strongest dividends you can find, and its yield of 5.6% provides as much, if not more, than many of the nation's electric utilities.
There you have it; five companies that I'd refer to as the ultimate beta blockers! With the right mix of sectors, yield, beta, and value, a mix of companies like these five can help you sleep better at night while simultaneously putting dividend income in your pocket.
Do you have a different set of beta blockers you'd recommend? Share them in the comments section below, and consider adding the five mentioned here to your free and personalized watchlist.
If the idea of low-beta, high-yielding, stocks interests you, then our analysts take on "9 Rock-Solid Dividends to Secure Your Portfolio" might be right up your alley. Download this report for free, for a limited time only!
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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