“Beta” is one measure of relative volatility that compares a stock’s price movement to the movement of a broader index, typically the S&P 500 (for U.S. equities). Low-beta stocks are those that underperformed when the market rose and outperformed when the market fell.
For example, if the S&P 500 falls 10% and stock ABC falls 10%, ABC would have a beta of 1. If the S&P fell 10% and stock XYZ fell 5%, XYZ would have a beta of 0.5. Because it compares past price movement with past index performance, beta is entirely backward-looking.
That being said, a stock with a persistently low beta (absent material changes to the business or sector) would generally be expected to maintain that lower level of relative volatility.
Value investors typically disregard technical price comparisons like beta, so identifying low-beta stocks is largely irrelevant. (Just ask our value stock expert Bruce Kaser, who’d gladly buy underperforming stocks with sound fundamentals because they’d be trading at an even deeper discount.)
At the same time, growth investors seek to identify stocks that are upward trending and outperforming (high beta) the market.
So, who’s it useful for? Well, potentially, an investor that has no directional bias (neither bullish nor bearish) that’s tired of watching a kangaroo market bounce up and down with seemingly no progress.
A couple of caveats there though: 1) The market has a built-in directional bias (bullish over the long term), and 2) a well-constructed bond portfolio is likely to offer more predictability and better overall returns (especially if you can buy bonds you plan to hold to maturity) than low-beta equity investments. One important aspect here is that it’s not an all-or-nothing consideration.
Let’s imagine an investor that is risk-averse, knows they should be invested, but is expecting the market to continue chopping around for the next few quarters (say, through the end of summer) and just wants to try and capture a few quarters of dividends while they wait for the market to get its act together.
One option is to simply go to cash and collect some of the increasingly attractive yields on savings accounts (prevailing rates are high 3% to low 4% depending on the bank). A second option, that better aligns with the market’s directional bias, would be to stay invested in stocks but use some high-yield, low-beta stocks to reduce your overall portfolio beta.
Portfolio beta is the relative volatility of your entire equity portfolio. If your portfolio starts with a beta of 1, and you reallocate 10% of that into stocks with betas of 0.5, your overall portfolio beta drops down to 0.95. A 20% reallocation under the same scenario drops your portfolio beta to 0.9. As a point of comparison, simply going to cash (beta of 0) with 10% of the overall portfolio drops the beta to 0.9 while going to cash with 20% of the portfolio drops the beta to 0.8.
Using low-beta stocks as a means of reducing portfolio beta can allow you to maintain your portfolio’s asset allocation (60/40 stocks and bonds, for instance) while simultaneously reducing overall portfolio volatility.
So, returning to the question of who this is for, low-beta stocks can be looked at as a way to fine-tune your portfolio, rather than overhaul it. The goal is not to find a new investing strategy or change your risk tolerance, it’s to increase your level of comfort with the strategy you already have in place during periods of market volatility.
With that in mind, we screened through the stocks in the S&P 500 to identify the five stocks with the lowest betas and the highest yields. They won’t be right for every investor, but they’re a good place to start looking if you’re not entirely comfortable with your portfolio volatility. The table below sorts these stocks from lowest to highest beta.
5 High-Yield, Low-Beta Stocks
|Coterra Energy (CTRA)||10.36%|
|Duke Energy (DUK)||4.24%|
|Pinnacle West Capital (PNW)||4.47%|
|Dominion Energy (D)||4.94%|
Of those five, Verizon (VZ) really jumps out due to its size, dividend history and current yield. Plus, it’s likely to be resilient regardless of the economic conditions for the rest of the year.
And resiliency is an important quality to have in your portfolio to help it avoid some of the extreme highs and lows in today’s volatile market.