Two studies from Russell Investments, an asset management firm, recently reported that low beta stocks, those stocks that are the most stable, return the most over time for shareholders. The studies cover 20- and 40-year periods dating back to 1968.
That counters the basic tenet of the risk/reward ratio that higher returns could only come from riskier holdings. For long-term investors, this revelation presents many attractive opportunities for patient investors willing to buy stocks that aren’t considered high-reward.
Low beta stocks offer a unique set of appealing features: high stability, high dividend yield, and high growth.
This makes sense when considering what results in a stock having a low beta, which means the share price moves up and down less than the stock market as a whole.
To have a low beta means that the share price does not move around that much. That means there is below-average buying and selling in the stock. The low selling suggests that investors who do buy these stocks tend to hold on to them. A rewarding return and a bullish outlook for the future are reasons why investors hang on to low beta stocks.
The high dividend yield is part of low beta stocks’ stability.
Income investors buy shares of a publicly traded security for the yield. That has to be for the long term or transaction costs such as commissions and capital gains would wipe out the income received in short-term trading. That commitment by shareholders leads to less volatility from fewer shares being sold, which enhances the low beta.
As the table below shows, there are many well-known blue chips with low betas and high dividend yields. What makes stocks such as Genuine Parts (NYSE: GPC), Johnson & Johnson (NYSE: JNJ), Raytheon Corp. (NYSE: TN), and ExxonMobil (NYSE: XOM) even more attractive in addition to the high dividend yield and the low beta are the manageable levels of debt and modest payout ratios. That ensures that there is plenty of cash to increase the dividends over time, rewarding long-term investors even further.
|Company||Beta||Dividend Yield||Payout Ratio||Debt-to-Equity Ratio|
|Johnson & Johnson||0.56||2.70%||34.80%||0.20|
ExxonMobil, Genuine Parts, Raytheon Corp., and Johnson & Johnson are all well-known, blue-chip, large-cap equities. There are many small caps that have high dividend yields and low betas, too.
It’s even more impressive for a small cap to have a low beta as many institutional investors such as mutual funds and pension groups cannot invest in publicly traded companies beneath a certain market capitalization. Ownership by mutual funds, pension groups, and other institutional investors is generally long term, which helps to stabilize a stock and keep the beta low.
Having a high dividend yield and a low beta is not just the domain of large cap blue chips. But it is a manifestation of a company that is managed well. The low levels of debt and dividend payout attest to that.
The ultimate proof, however, is all that matters to investors: the increasing value of the asset. Thankfully, Russell Investments provided that proof.
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