3 Low Beta Stocks to Reduce Volatility and Increase Income
When it comes to protecting to the downside, something not everyone considers when in the midst of a bull market, investors in dividend stocks need to be aware of the volatility of their stocks. Owning too many high-risk positions can create a scenario where your portfolio loses more than the S&P 500 index.
To help prevent this, we suggest that investors consider a stock’s beta (a common measure of stock volatility) when purchasing a stock. The higher the beta, the more volatile it can be relative to the S&P 500 index, which means greater losses in a market downturn.
This article will examine three of our top-ranked low beta stocks that have relatively low volatility compared to the broader market. The names discussed here include:
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These three stocks also generate consistent growth on a yearly basis and pay a healthy and safe dividend.
Also, these stocks are much more likely to hold up better in a recession due to their low betas and could prove to be excellent investments during these times.
Dividend Stocks: Campbell Soup (CPB)
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First on our list of dividend stocks, Campbell Soup is a leading manufacturer of branded convenience food, with the company selling its products in approximately 120 countries. The stock has a beta of just 0.14. With a beta value of 0.14, Campbell Soup stock can be expected to move 0.14% up or down for every corresponding 1% move in the S&P 500 Index.
Campbell Soup has a portfolio of well-known brands, including its branded soup and Campbell’s Chunky. Also included in the portfolio are SpaghettiOs, Pepperidge Farm, Gold Fish, V8, Pace, Kettle chips, and Swanson Broths.
The company reported fourth quarter and fiscal year 2021 results on Sept. 1, 2021. Revenue fell 11% to $1.9 billion while adjusted earnings-per-share declined 13% to $0.55. Earnings-per-share from continuing operations did increase 42%. For the year, revenue was lower by 2% and adjusted earnings-per-share improved 1%. This comes on the heels of a strong fiscal year 2020 as the company benefited from strong Covid-19 related demand.
CPB stock has been the definition of a slow grower over the years. Earnings-per-share have increased at just 2.2% over the last decade. We anticipate that the company will grow earnings at a rate of 2.5% annually for the next five years. Earnings-per-share grew more than 10% from 2007 to 2009, showing the company’s resiliency during the last recession. The dividend also grew 25% during this period of time.
The stock is trading with a price-to-earnings ratio of 14.3 today. This is below our target valuation of 16.5, so there is the possibility of multiple expansion for the stock as well.
Campbell Soup yields 3.7% today, nearly three times the average yield of S&P 500 index. This is also above the long-term average yield of 2.9% for the stock. The expected payout ratio for fiscal year 2022 is just 53%, giving the company a well-protected dividend.
Conagra (CAG)
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Conagra has changed its name several times over its long and storied history, but what remains the same is the company’s leading lineup of very popular brands. The company has annual revenues in excess of $11 billion. The stock has a beta of 0.21.
The company also has best-selling brands in a variety of categories, including Hunt’s, Slim Jim, Marie Callender’s, Reddi Whip, Birds Eye and Vlasic. The popularity of the company’s brands was on display during the pandemic as earnings-per-share growth reached the low to mid-double-digit range in both fiscal year 2020 and 2021.
Some of this growth was surely tied to the higher number of meals consumers were forced to eat at home following social distancing restrictions. However, many of these consumers have become repeat customers. Revenue did fall in the most recent quarter, announced on Oct. 7, 2021, but by just 1% and were significantly higher from pre-pandemic levels. Revenue grew almost 11% from the first quarter of fiscal year 2020.
Even coming off a high base, we feel that Conagra can grow its earnings-per-share at a rate of 4% going forward, which is in-line with the long-term average. Earnings-per-share did dip in 2008, before rebounding to a new high in 2009. Overall, earnings-per-share grew nearly 13% during this time. The dividend increased 5.6% from 2007 to 2009.
Conagra trades with a price-to-earnings ratio of 13.2 at the moment. This is slightly below our target valuation of 14 times earnings, so buyers today would be getting a discount to our medium-term target.
And while waiting for multiple expansion, investors would also be paid a 3.8% dividend yield, a full percentage point better than the stock’s average yield of 2.8% over the last 10 years. Even after 29.4% and 13.6% dividend increase over the last two years, Conagra has an expected payout ratio of 50% for the current fiscal year.
Dividend Stocks: Verizon (VZ)
Rounding out this list of dividend stocks, Verizon has morphed into one of the largest carriers in the country, with service stretching to nearly every corner of the county. The company also offers internet and Fios services to customers as well. The company has annual revenues of $128 billion and a market capitalization of $218 billion. Verizon has a beta of 0.43.
The company has several factors working in its favor. As one of the largest providers of wireless services, Verizon is in an excellent position to attract and defend its customer base. The popularity of its business is evident by the fact that less than a net 1% of customers switch providers each year. And with few competitors, the barriers to entry are extremely high in the telecommunications business.
The ongoing rollout of 5G will also be a tailwind to results. Verizon was the first carrier to turn on service and already millions of 5G capable connected devices.
Verizon reported third quarter results on Oct. 20, 2021. Revenue was up more than 4% while adjusted earnings-per-share was 13% better than the prior year. The company had almost 700K net additions, including 429K phone additions. The consumer segment, the largest contributor to revenue, was up more than 7% due to strength in 5G-phone adoption.
Earnings-per-share compounded at a rate of 9.6% annually for the 2011 to 2020 period of time, but growth has slowed in the near term. We believe that earnings will grow 4% annually over the next five years. The company actually saw 2.5% earnings growth during the last recession, making it one of the few to actually show growth during a very difficult time. Dividends grew more than 13% over these two years as well.
Shares have a price-to-earnings ratio below 10 at the moment. We feel that fair value is closer to 13 times earnings, allowing for possibility of a decent contribution from multiple expansion.
Verizon has a fairly length dividend growth track record which stands at 17 years today. Dividend growth hasn’t been great (~2% per year), but the yield of 4.9% is above the 10-year average yield of 4.5%. The payout ratio is expected to be 48% for 2021.
Final Thoughts
When the market is making new highs seemingly every day, investors can be forgiven if they gravitate toward higher growth stocks.
While these types of investments have their place in a portfolio, investors need to be prepared for the eventual economic downturn that leads to a recession. Therefore, investing in stocks with very low betas can help to minimize losses.
Campbell Soup, Conagra and Verizon all trade at very low betas, making them less volatile than the S&P 500 index as a whole. In the case of these three dividend stocks, shareholders of each are being paid a generous and safe dividend yield. At the same time, all three names trade below our expected valuation, which could allow for the benefit of multiple expansion.
Investors looking to protect their portfolios and raise their income levels could do well owning all the three names discussed here.
On the date of publication, Bob Ciura did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.
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