Tuesday, August 30, 2011

7 High Quality, Low Beta Dividend Stocks

Dividend stocks are sometimes referred to as defensive stocks since many investors flee to them in an economic downturn. Their dividends, if sustainable, provide a minimum level of positive return. This cushions the downward pressure from the market. But what happens when the market turns up?

Beta: A Measure of Volatility

Beta (β) is a quantitative measure of the volatility of a given security or portfolio relative to the overall market, usually the S&P 500. By definition, the market has a beta of 1.0 and securities are ranked according to how much they deviate from the market. Thus, securities with a beta above 1 are more volatile than the overall market, while those with a beta below 1 are less volatile. High-beta stocks are considered more risky, but provide a potential for higher capital returns. Low-beta stocks normally provide less risk and lower opportunities for capital gains.

Betas And Dividend Stocks

Dividend stocks tend to have low betas. That means during a market downturn, they tend not to fall as much as the market in total. Hence, the term defensive stocks. It is also important to note that defensive stocks tend to be non-cyclical. Examples would include food, tobacco, oil, and utilities where demand is remains stable under difficult economic conditions.

Here are some of my low beta holdings:

AT&T Inc. (T)
Yield: 5.9% | Beta: 0.67
AT&T Inc. (formerly SBC Communications) provides telephone and broadband service and holds full ownership of AT&T Mobility (formerly Cingular Wireless). AT&T Corp. was acquired in late 2005 and BellSouth in late 2006.

The Coca-Cola Company (KO)
Yield: 2.7% | Beta: 0.60
The Coca-Cola Company is the world's largest soft drink company with a sizable fruit juice business.

Colgate-Palmolive (CL)
Yield: 2.6% | Beta: 0.50
Colgate-Palmolive Company (Colgate) is a major consumer products company that markets oral, personal and household care, and pet nutrition products in more than 200 countries and territories.

McDonald's Corporation (MCD)
Yield: 2.7% | Beta: 0.48
McDonald's Corporation is the largest fast-food restaurant company in the world, with about 32,500 restaurants in 117 countries.

Wal-Mart Stores, Inc. (WMT)
Yield: 2.7% | Beta: 0.33
Wal-Mart Stores, Inc. is the largest retailer in North America and operates a chain of discount department stores, wholesale clubs, and combination discount stores and supermarkets.

Consolidated Edison (ED)
Yield: 4.2% | Beta: 0.31
Consolidated Edison, Inc. is an electric and gas utility holding company that serves parts of New York, New Jersey and Pennsylvania.

Abbott Laboratories (ABT)
Yield: 3.8% | Beta: 0.31
Abbott Laboratories is a diversified life science company and is a leading maker of drugs, nutritional products, diabetes monitoring devices, and diagnostics.

This of coarse works against you when the market turns up. The low beta means the stocks don’t increase as fast as the market in an upturn. As a dividend investor, I should expect to under-perform the market during significant bull markets. I have selected certain higher beta stocks to mitigate this shortfall. However, as a dividend investor my goal is an ever-increase stream of dividend income, not to maximize total shareholder return.

When the market turns up, low beta stocks normally won’t increase as fast as the market in total. However, as a long-term dividend investor, my goal is an ever-increase stream of dividend income, not to maximize capital appreciation.

Full Disclosure: Long T, KO, CL, MCD, WMT, ED, ABT. See a list of all my dividend growth holdings here.
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- Are REITs and Utilities Good Dividend Investments?
- Market Timing vs. Buy And Hold
- Should You Still Buy-And-Hold Stocks?
- Bonds: The Next Bubble to Burst?
(Photo: sanja gjenero)
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