3 stocks with low volatility and above-average returns

Bear markets, such as 2022, generally leave little place for investors to hide. Most stocks are priced for some level of growth, and therefore, when fears of a recession or higher interest rates strike, most stocks go down. However, there are some stocks that offer a diversification effect on your portfolio, as they tend to move separately from the broader market.

One way to measure this diversification component is through beta, which is a measure of a stock’s volatility relative to a benchmark. In this case, we can measure the beta of the stock relative to the S&P 500, which gives us a measure of each stock’s volatility compared to simply owning the S&P 500 via an index fund.

With that in mind, let’s look at three stocks that not only have low betas, but also high dividend yields. This combination of factors makes them attractive to hold during bear markets.

An appetizing beta

Our first stock is McDonald’s (MCD), the ubiquitous owner and franchisor of McDonald’s restaurants in the United States and internationally. The chain offers its popular line of sandwiches, fries, drinks, sides and more. It operates or franchises approximately 40,000 stores worldwide, only a small fraction of which are company-owned.

McDonald’s was founded in 1940, produces approximately $23 billion in annual revenue, and operates with a market capitalization of $200 billion.

McDonald’s stock has a five-year beta of 0.65, which means it generally moves in the same direction over long periods as the S&P 500, but at 65% of the magnitude. In practice, this means that in theory, if the S&P 500 falls 10%, McDonald’s should fall 6.5%.

In practice, McDonald’s is up about 1% so far in 2022, while the S&P 500 is down 17%. That’s the power of holding diversified stocks with low beta values.

McDonald’s also has an impressive 47-year streak of dividend hikes, putting it in rare company by that measure. The payout ratio is currently just over 60% of earnings, so the dividend is very safe, particularly given the company’s reliable revenue and earnings. The yield is currently 2.2%, which is about 60 basis points better than the S&P 500.

We also expect to see annualized earnings growth of 6% for the foreseeable future, which means McDonald’s should have ample runway to continue raising its dividend for many years to come.

Finally, despite the fact that McDonald’s operates in what is generally a very cyclical industry — restaurants — its entrenched position and value proposition mean its earnings hold up during recessions far better than most of its peers. Indeed, during recessions, McDonald’s tends to gain share given its value proposition, so even in recessions, we see McDonald’s as a strong product.

“Sanitize” your wallet

Our next stock is Clorox (CLX), a company that manufactures and distributes a wide range of consumer and professional cleaning products worldwide. The company operates in four segments: Health & Wellness, Family, Lifestyle, and International. Through these segments, Clorox distributes its namesake Clorox cleaning products, but it also has a long list of other cleaners, food products, vitamins and supplements, as well as pet products and more.

Clorox was founded in 1913, generates approximately $7.1 billion in annual revenue, and has a current market capitalization of just over $18 billion.

Clorox has a five-year beta of just 0.29, which means it tends to move mostly independently of the S&P 500. This stock, therefore, has a significant diversification effect on one’s portfolio, which is especially useful during bear markets. So far in 2022, Clorox has roughly matched the S&P 500 with a -16% price return.

Clorox also has a dividend streak approaching 50 years, which means it’s also exemplary when it comes to dividend longevity. The company’s payout ratio is actually higher than earnings for this year, but that should be temporary. Clorox has been booming during the pandemic and that is easing to some extent. We expect normalized earnings in the years ahead as earnings growth of 12% from currently low levels should make the dividend more sustainable again.

Clorox has a yield of 3.2% today, which is about double that of the S&P 500, so it’s also a strong income stock.

Finally, Clorox sells what are mostly commodities, which means that recessions do little to dampen demand. This means that it holds up well during bear markets and recessions.

A dividend king in waiting

Our final stock is Walmart (WMT), the renowned value leader in general retail. The company has more than 10,000 stores worldwide, collectively supplying hundreds of millions of people each year with groceries, pantry items, home, automotive and garden products, and more.

Walmart was founded in 1945, generates a staggering $600 billion in annual revenue, and operates with a market capitalization of $417 billion.

Walmart’s five-year beta is 0.53 relative to the S&P 500, so it’s between McDonald’s and Clorox in terms of diversifying impact. Walmart is up 6% this year, beating the S&P 500 by about 23% in 2022.

The company boasts a 49-year streak of dividend hikes, and we expect the company’s next declared dividend to make it a dividend king. The payout ratio is extremely low, just 38%, so the dividend has many years of likely increases ahead of it. We also expect earnings growth of 8% in the years ahead, which means Walmart is likely to be a solid dividend growth stock in the years ahead.

The yield is nearly equal to the S&P 500, so it’s not quite the pure income stock that Clorox is, for example.

Finally, Walmart is famous in the investment community for its recession resilience, as it is the ultimate value proposition when it comes to physical retail. The company’s low-price strategy means it holds up very well in all kinds of economic conditions.

Final thoughts

While bear markets can be difficult to manage, there are strategies investors can use to minimize the negative impact. Finding great dividend stocks with low beta values, such as McDonald’s, Clorox, and Walmart, can provide investors with a safe haven in terms of low volatility and income.

For example, these three stocks in 2022 in equal parts would have returned -3%, excluding dividends, and would have returned 2.3%. These percentages compare quite favorably with the S&P 500’s -17% price return and 1.6% return. Such is the power of low-beta stocks, and that’s why we like these three during what has been a bear market in 2022.

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