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Widow and orphan stocks: An old-timey term for a very relevant investing strategy

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·3 min read
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Widow and orphan stocks: An old-timey term for a very relevant investing strategy
Widow and orphan stocks: An old-timey term for a very relevant investing strategy

At one time, both widows and orphans faced an uncertain future and a dire need for income. Enter “widow and orphan stocks” — essentially shares in blue-chip companies that have a solid track record of profits and dividends.

They promised reliability and income for vulnerable investors through established and profitable companies that are less sensitive to cyclical ups and downs. You don’t get the growth riskier stocks offer, but you get relative security and a steady income.

It’s now been nearly a century since the term “widow and orphan stocks” first appeared, and a lot has changed since then, says David Christianson, certified financial planner and portfolio manager for National Bank Financial Wealth Management in Winnipeg, Canada.

“[The term] was more useful back when people thought the stock market was a place in which to speculate, potentially strike it rich … make big, quick returns by betting on the next big thing,” says Christianson.

And today? In this volatile market, everyone could benefit from treating themselves like widows and orphans.

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The secret sauce in this strategy

While the term is outdated, Christianson says the principle behind it has endured — in fact, it has displaced other strategies to become the go-to approach in investing.

“In general, what used to be called widow and orphan stocks have generally outperformed the other class which are… growth stocks,” says Christianson.

Looking for the safe and steady stocks that widows and orphans tended to favor isn’t hard. Think of the big banks, commodities or utilities — businesses that provide essential services or products that are still needed regardless of the state of the economy.

Depending on how you define it, some examples may include Verizon (VZ), WalMart (WMT) and energy company Exxon Mobil (XOM).

But experts would remind you even with “low risk stocks,” there’s never zero risk associated with the stock market.

“I think it’s really important to note … that [you] are still investing in the stock market,” says Ryan Gubic, a certified financial planner and founder of MRG Wealth Management in Calgary, Canada. “There is no guaranteed return. These types of stocks can have a history of going down less than some of the higher risk alternatives, but you can still lose money.”

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Pick your portfolio wisely

The widow-and-orphan strategy is boring, but it has a track record of working.

Gubic advises his clients and DIY investors who follow this approach to remember to stick with it. Don’t follow your gut or intuition about which way you think the market will go. Instead, evaluate your goals, how much risk you’re willing to take on compared to how much risk you can afford to take on. Then — and only then — should you pick your investments.

“Let’s say someone … says, I'm comfortable with a ton of risk. And they're, for example, maybe a single mom with three kids at home and a number of other factors, the capacity might not match what their comfort level is,” says Gubic.

“Sticking to a plan and a strategy over the long haul has been a proven recipe to help people achieve their goals, versus trying to time the market,” says Gubic. “And I think that's a common major mistake that some do-it-yourself investors try to make.”

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

— With files from Samantha Emann

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.