“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 underperform when the market rises and outperform when the market falls, and by targeting stocks with high dividend yields, we can offset some of that performance gap with more income from dividends.
When calculating beta, you simply compare the performance of a stock with the underlying index.
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.
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Value investors typically disregard technical price comparisons like beta, so identifying low-beta stocks is largely irrelevant.
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 concerned about volatility while stocks trade near all-time highs.
One caveat though. The market has a built-in directional bias (bullish over the long term) that can lead to long-term underperformance (for low-beta stocks) if your portfolio is built around stocks that simply don’t move as much as the market as a whole.
So let’s imagine an investor who has enjoyed watching stocks rise to all-time highs but is now concerned that the market is topped out and won’t make meaningful progress in the short term.
One option is to simply go to cash and collect some of the attractive yields on savings accounts while they last (rates are expected to begin dropping with this week’s Fed meeting).
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.
What Is Portfolio Beta, and How Can You Change It?
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.
Put another way, reducing your portfolio beta can make the equity portion of your investments less volatile.
If you have a portfolio beta of 1 and the S&P 500 were to fall 10%, you’d expect the stock portion of your portfolio to fall 10% as well.
If you reduce your portfolio beta to 0.9, you would expect that same 10% drop in the S&P to pull your portfolio down only 9%.
It’s a stabilizing force in choppy markets but can cost you money during bull markets.
However, 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 (below 1) and the highest yields (above 5%).
The idea behind that screen is that low-beta stocks offer less in the way of capital appreciation (but are also expected to fall less if the market rolls over), so by targeting stocks with a high yield, we’re replacing that lost appreciation opportunity with higher cash flow from the dividends.
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 highest yield to lowest.
5 High-Yield, Low-Beta Stocks
| Stock (Ticker) | Beta | Dividend Yield |
| Altria (MO) | 0.69 | 7.87% |
| Verizon (VZ) | 0.4 | 6.03% |
| Pfizer (PFE) | 0.65 | 5.64% |
| Kinder Morgan (KMI) | 0.92 | 5.30% |
| Crown Castle (CCI) | 0.85 | 5.23% |
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.
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