If the stock market has demonstrated anything over the past 10 years, it's that investing for the long term is your smartest move. However, not all investors have the mindset to withstand a 50% drop and then a whipsaw rally. For investors nearing or already in retirement, watching 20% or more of their money evaporating because of a bad earnings report, a rumor out of China, or a minor slowdown in U.S. growth prospects may be terrifying. But this is a reality that investors deal with.
Fortunately, the good news is that low-risk stocks do exist that focus on preserving investor capital and providing steady income, which is what most seniors and some pre-retirees typically want when investing in the stock market. I take a closer look at a couple of these deals below.
But, as always, one note of caution: Stocks can go down just as easily as they go up. It's possible the following low-risk stocks could lose value, and it's important you use these selections merely as a jumping-off point for your own research and risk tolerance, rather than as a concrete buy signal for these companies.
Johnson & Johnson (NYSE:JNJ)
If you're looking for low-risk stocks that could be a great deal over the long run with below-average volatility, then I'd strongly suggest investors take a closer look at healthcare conglomerate Johnson & Johnson.
One of the factors that make Johnson & Johnson so attractive is its size and diversity. The company consists of three business operations -- consumer health products, medical devices, and pharmaceuticals -- that offer something to every type of investor. The consumer health division, consisting of over-the-counter products such as Tylenol, offers strong pricing power and steady cash flow, but a slow growth rate. The medical devices division has also sported a slow organic growth rate of late as competition heats up. But as the global population ages and access to medical care becomes easier, this should become a long-tail growth opportunity. Lastly, the pharmaceuticals segment offers a potentially high-growth opportunity with huge margins; though it can, of course, be susceptible to patent expirations from time to time, which is where the steady growth of other segments comes into play.
Johnson & Johnson has grown its adjusted EPS every year for more than three consecutive decades, and it's currently riding a streak of 53 years of boosting its annual dividend. Furthermore, out of all publicly listed companies, just three bear the AAA credit rating, and Johnson & Johnson is one of them. This rating implies that Standard & Poor's has the utmost confidence that J&J can meet its debt obligations.
With a below-average beta (a measure of volatility), a forward P/E nearing just 15, and a dividend yield of 3%, well above the broader-market average, J&J appears to be a low-risk stock that risk-averse investors can trust.
American Water Works (NYSE: AWK)
Water is one of life's basic necessities, but investors often forget that it can also be a valuable commodity for a company like American Water Works, a water and wastewater utility company serving approximately 15 million people across North America.
What makes American Water Works so attractive is that demand for water and wastewater services should rise as the U.S. population increases. We can't live without water, and with the exception of a drought, water usage is likely to increase over time, meaning American Water Works' long-term growth outlook appears safe.
But there's more to this company than just a growing population. American Water Works' business is also regulated by individual state regulatory commissions that determine whether the company's price increase requests are reasonable. On one hand, that may sound more like a crutch than a good thing. Being able to raise prices at will would appear to be a much better deal for investors. However, regulated utilities have the most predictable profits and dividends because there are rarely any surprises. It means American Water Works investors don't have to worry about being exposed to the fluctuations sometimes seen in unregulated markets.
For American Water Works, the future probably holds more bolt-on acquisitions (which is its primary method of growth) and a juicier dividend. With a microscopic beta of 0.55 (meaning it's only 55% as volatile as the S&P 500), a dividend yield of 2.7%, and a reasonable forward P/E of 18, American Water Works could easily fill investor portfolios with profits over the long run just as a leaky faucet fills a bowl over time.
As you've probably figured out by now, some of the best deals in low-risk stocks are found among basic-needs products and services. Not having cellular service or the Internet certainly won't kill you, but the idea of interconnectivity is so engrained in our lives that it's practically become a basic need. That's why a content service provider such as Verizon is so attractive for risk-averse income investors.
Verizon's acquisition of Vodafone's 45% stake in Verizon Wireless last year, giving Verizon sole ownership, could be the key to driving Verizon's growth for years to come. Although the cellular markets in the U.S. are arguably saturated, the willingness of U.S. consumers to upgrade to next-generation smartphones and consume data at a growing pace implies that Verizon's opportunity to aggressively price its data plans and reap sizable margins off those plans should continue moving forward.
Verizon also has a discernible advantage over its U.S. wireless rivals in terms of its 4G-LTE network buildout. Verizon can use this advantage as a dangling carrot to draw consumers from other networks, or to retain existing customers. In its most recent quarter, Verizon's churn rate was just 0.9%, its lowest rate in three years, implying that customers are staying more loyal to the company.
Sporting a low beta of 0.62, a forward P/E of just 11, and a whopper of a dividend yield that's just below 5%, Verizon could be just what the doctor ordered when it comes to low-risk, low volatility stocks for income-seeking investors.
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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