Low Volatility Stocks for Peace of Mind
Watching just a few minutes of TV news at night makes me reach for the bourbon. Here’s a quick list of global woes and it’s by no means comprehensive:
New U.S. tariffs of 15% against $160 billion worth of Chinese goods are scheduled to take effect December 15. The White House says the tariffs are “still on the table.” Analysts warn that tit-for-tat tariffs will probably hasten the onslaught of recession.
The British national election on December 12 will decide the fate of Brexit and possibly lead to a messy no-deal departure from the European Union. Britain’s exit from the EU is expected to harm global growth, especially if there’s a so-called “hard” Brexit.
The U.S. House has unveiled two articles of impeachment against President Trump. The president is at war with Congress and most of the U.S. establishment. Americans are bitterly divided and chaos reigns in Washington.
The global economic engine of China is sputtering, with the country’s gross domestic product growth and manufacturing activity in decline.
I could go on, but you get the picture. I suggest you heed the timeless advice of my literary hero, Ernest Hemingway:
“Worry a little bit every day and in a lifetime you will lose a couple of years. If something is wrong, fix it if you can. But train yourself not to worry: Worry never fixes anything.”
Hemingway was a wise man (and he could hold his bourbon). His timeless advice is easier said than done, of course. But here’s a prescription to soothe your investment anxieties: dividend-paying stocks.
A trifecta of growth, income and safety…
Now’s an opportune time to increase your portfolio’s exposure to dividend-paying stocks in general and the Dividend Aristocrats in particular.
The Dividend Aristocrats are considered by some investors to be “boring.” These stocks don’t get a lot of fawning coverage by the carnival barkers on CNBC. And yet, this type of asset class confers a combination of growth, income and safety. If that’s boring, sign me up.
To cope with the market’s increasing volatility, you should pare back your growth stock holdings and elevate cash levels. That said, quality dividend-paying stocks still have a lot to offer. Unlike bonds, stocks offer potential dividend growth and share-price appreciation.
The so-called Dividend Aristocrats always provide fertile ground for income investors. But you don’t have to be an income investor to love these stocks.
To earn the honorific Dividend Aristocrat, a company must typically have raised dividends for at least 25 years. More precisely, the company needs to have a managed dividend policy that increased its dividend every year for those 25 years.
These dividend powerhouses constitute the S&P 500 High Yield Dividend Aristocrat Index, an official index of the 50-plus highest dividend yielding stocks in the S&P Composite 1500. This Aristocrat Index is maintained by Standard & Poor’s, which every December updates the list of companies that make the grade.
By its very nature, a Dividend Aristocrat tends to be a large and stable blue-chip company with a strong balance sheet. Many of these companies are familiar names that produce household brands. Because of their strong balance sheets and financial wherewithal, they tend to weather market ups and downs.
During 2008, the Dividend Aristocrat Index fell 22%, whereas the S&P 500 fell 38%. That’s just the sort of shelter you need as storm clouds threaten again.
Year to date, the Dividend Aristocrats, as measured by the benchmark ProShares S&P 500 Dividend Aristocrats ETF (NOBL), have generated a total return of 25.3%, compared to 27.3% for the SPDR S&P 500 ETF Trust (SPY), as of market close Tuesday.
But short-term performance isn’t fully instructive. Performance should be measured over a minimum of three years, preferably longer. The Dividend Aristocrats Index has outperformed the market by over a full percentage point annually over the last 10 years, with lower volatility (see chart).
As the recovery continues moving through its late stage, dividend-paying stocks are smart bets. Indeed, sector rotation is underway, as investors transition from momentum “story stocks,” such as the over-hyped Internet darlings, toward reasonably valued dividend-paying stalwarts that offer stability.
When our investment team judges the merits of a dividend stock, we always look for 1) healthy payout ratios; 2) plenty of cash on hand; and 3) earnings growth. These quality dividend payers demonstrate greater resilience during economic uncertainty.
One sector known for paying robust and sustainable dividends is the utilities sector. Within the paradoxical backdrop of continued economic recovery and market risk, investors who seek both growth and downside protection should increase their exposure to utilities stocks.
Income investors covet the high dividends from utilities. These businesses tend to be stable, generating growing dividends and stock price appreciation over time. Utility stocks add ballast to a diversified portfolio.
As the British government descends into farce and the world’s two largest economies pursue a mutually destructive trade war, you should focus on long-term investment trends that are unstoppable.
Electricity is the epitome of an essential need. Small wonder, then, that utility stocks have been on a tear this year, as investors seek safety but want to stay in the investment game.
As of the market’s close Tuesday, the benchmark Utilities Select Sector SPDR (XLU), the largest utilities exchange-traded fund by assets, had returned 21.7% year to date, compared to the SPY’s YTD return of 27.3%. XLU’s performance is extraordinary, considering the fact that it’s geared toward safety.
For our “dividend map” of the best utilities stocks to buy, click here now. These companies are cash cows that generate juicy double-digit yields, year in and year out. If you’re looking for sleep-well-at-night investments, our dividend map is for you.
Questions about portfolio protection? Drop me a line: firstname.lastname@example.org
John Persinos is the managing editor of Investing Daily and the premium trading service, Utility Forecaster.