Bear markets, like the one in 2022, usually leave little hiding place for investors. Most stocks are priced on some level of growth, and therefore when fear of a recession or rising interest rates arises, most stocks fall. However, some stocks provide a diversification effect on one’s portfolio, in that they tend to separate themselves from the wider market.
One way to measure this diversification component is to use beta, which is a measure of a security’s volatility relative to a benchmark. In this case, we can measure the beta of stocks against the S&P 500, which gives us a measure of how volatile each stock is compared to simply owning the S&P 500 through an index fund.
With that in mind, let’s look at three stocks that not only have low beta values, but also high dividend yields. This combination of factors makes them attractive to hold during bear markets.
An appetizing beta
Our first stock is McDonald’s (MCD), the ubiquitous owner and franchisor of McDonald’s restaurants in the United States and around the world. The chain offers its famous range of sandwiches, fries, drinks, sides, etc. It operates or franchises around 40,000 stores worldwide, of which only a small fraction is company-owned.
McDonald’s was founded in 1940, produces approximately $23 billion in annual revenue, and trades with a market capitalization of $200 billion.
McDonald’s stock has a five-year beta of 0.65, meaning it generally moves in the same direction over long periods as the S&P 500, but at 65% magnitude. In practice, this means that in theory, if the S&P 500 falls 10%, McDonald’s should fall 6.5%.
In practice, McDonald’s is up about 1% so far in 2022, while the S&P 500 is down 17%. This is the power of holding diversified stocks with low beta values.
McDonald’s also has a very impressive 47-year streak of dividend increases, which puts it in rare company on this metric. The payout ratio is currently just over 60% of earnings, so the dividend is very safe, especially given the company’s reliable revenue and earnings. The yield is currently 2.2%, about 60 basis points better than the S&P 500.
We also expect annualized earnings growth of 6% for the foreseeable future, which means McDonald’s should have plenty of room to continue increasing its dividend for many years to come.
Finally, despite the fact that McDonald’s operates in what is typically a highly cyclical industry – restaurants – its entrenched position and value proposition means its earnings hold up much better during recessions than most of its peers. In fact, during recessions McDonald’s tends to gain market share given its value proposition, so even in a recession we consider McDonald’s to be a strong performer.
Clean up your portfolio
Our next stock is Clorox (CLX), a company that manufactures and distributes a wide range of consumer and professional cleaning products worldwide. The Company operates in four segments: Health and Wellness, Household, Lifestyle and International. Through these segments, Clorox distributes its namesake Clorox cleaning products, but also offers a long list of other cleaners, food products, vitamins and supplements, as well as pet supplies and more.
Clorox was founded in 1913, generates approximately $7.1 billion in annual revenue, and has a current market capitalization of just over $18 billion.
Clorox has a five-year beta of just 0.29, meaning it tends to move mostly independent of the S&P 500. This stock therefore has a significant diversification effect on its portfolio, which is particularly useful during downturns. bear markets. So far in 2022, Clorox has roughly matched the S&P 500 with a price return of -16%.
Clorox also has a dividend streak approaching 50 years, meaning it’s also exemplary when it comes to dividend longevity. The company’s payout ratio is actually higher than this year’s earnings, but that should be temporary. Clorox has had a boom in the pandemic and it is unfolding to some extent. We expect normalized earnings in the coming years as earnings growth of 12% from currently low levels should make the dividend more sustainable again.
Clorox is yielding 3.2% today, about double that of the S&P 500, so it’s also a strong income stock.
Finally, Clorox primarily sells commodities, which means recessions do little to dampen demand. This means that it holds up well during bear markets and recessions.
A pending dividend king
Our ending stock is Walmart (WMT), the renowned value leader in general retail. The Company’s stores number more than 10,000 worldwide and they collectively supply hundreds of millions of people each year with groceries, pantry items, household, automotive and garden products, and more. Again.
Walmart was founded in 1945, generates a staggering $600 billion in annual revenue, and trades with a market capitalization of $417 billion.
Walmart’s five-year beta is 0.53 against the S&P 500, so it sits between McDonald’s and Clorox in terms of diversification impact. Walmart is up 6% this year, beating the S&P 500 by about 23% in 2022.
The company sports a 49-year streak of increasing dividends, and we expect the next dividend declared by the company to make it a Dividend King. The payout ratio is extremely low at just 38%, so the dividend has many years of likely increases ahead of it. We also expect earnings growth of 8% in the coming years, which means Walmart is likely to be a strong dividend-growing stock in the years to come.
The yield is roughly equal to that of the S&P 500, so it’s not quite the pure income stock that Clorox is, for example.
Finally, Walmart is famous in the investment community for its recession resilience, given that it is the ultimate physical retail value proposition. The company’s low-price strategy allows it to withstand all kinds of economic conditions very well.
Although bear markets can be difficult to manage, there are strategies investors can use to minimize the negative impact. Finding great dividend-paying stocks with low-beta stocks — such as McDonald’s, Clorox, and Walmart — can provide investors with a safe haven in terms of low volatility and earnings.
For example, these three shares in 2022 in equal shares would have returned -3%, excluding dividends, and would return 2.3%. These percentages compare quite favorably to the -17% price return and the 1.6% return of the S&P 500. Such is the power of low-beta stocks, and we like these three for that reason during what has been a tough bear market in 2022.
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