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4 More Low-Volatility Stocks for a Volatile Market - 10215 views
MILLBURN, N.J. (Stockpickr) -- Last week, I outlined the importance of seeking out stocks that seek to insulate one’s investment portfolio from high levels of volatility in the marketplace, such as those we experienced during the week ended Aug. 5. I identified six stocks: Procter & Gamble (PG), Pepsico (PEP), Johnson & Johnson (JNJ), Wal-Mart (WMT), Southern Company (SO) and Chubb (CB) as low-volatility stocks to consider in a volatile market.
Just one week later, we went from the frying pan into the fire as the equity markets, subsequent to Standard & Poor’s downgrade of the long-term credit rating on U.S. Treasury debt from AAA to AA+, experienced one of the most volatile and unpredictable weeks of trading ever.
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Let's review the volatile week that we just endured:
• The S&P 500 Volatility Index (VIX) rose from 32 the prior Friday to end the week at 36.36.
• That was after reaching a peak of 48 on Aug. 8 and a trough of 34.01 on Aug. 12, on an intraday basis
• The S&P 500 and Dow Jones Industrials had some of their biggest intraday swings ever.
• Since the Dow tends to get the ear of most non-professional investors and the media, let’s see how that index performed in the week just passed. On the surface, the Dow declined a mere 1.53%, but closer inspection of the daily swings reveals a significantly risky and volatile week. (To put the table below in perspective, since 1928, the average daily high/low range for the Dow Jones Industrials is 1.82%.)
Not even my six low-volatility stocks were immune from the market’s volatility. In just one week, each of those stocks had increases in its one-year historical realized volatility as follows:
It is important to note that each of those six stocks rose during what was possibly the most volatile week on record. I would also note that Wal-Mart went ex-dividend for 36.5 cents during the week, which only adds to that stock’s weekly gains above.
We should expect the high levels of volatility to persist for a meaningful period of time given all of the global macro problems that are still confronting investors. Hence, I think that we should round out my low-volatility stock portfolio with an additional four stocks.
Altria (MO) is one of those stocks that perform well in both good and tough economic times. I recently featured the stock in "6 Stocks to Win the Race," and it deserves a spot in my low-volatility portfolio as well.
Altria has one of the highest dividend payouts in the S&P 500 and is also one of the highest-yielding tobacco stocks. Last week, it climbed 2.69%.
This stock is not one for investors who seek socially responsible investing. With tobacco and alcohol in its brand portfolio, Altria is a quintessential sin stock. But in my book, making money is no sin.
AT&T (T) is the country’s largest telecommunications company, with a market capitalization of $168 billion. The history of AT&T is quite interesting. It started out as a telephone monopoly, was subject to an antitrust law suit in the 1980s, was then broken up into several companies and then over time has recombined most of the parts from the breakup into the current AT&T. You can watch Stephen Colbert's take on AT&T's split-up and recombination here.
All through AT&T’s trials and tribulations, the company has remained the quintessential widow and orphan stock, paying above-market-rate dividends and generating stable cash flow generation. Last week, shares of AT&T gained 1.88%.
Annaly Capital Management
Annaly Capital (NLY) is structured as a real estate investment trust, or REIT. As such, the company does not pay taxes directly to the government as long as it distributes at least 90% of its taxable income to investors. It acts as a pass-through entity whereby taxes will be paid by shareholders -- hence its very high dividend payout.
Annaly primarily owns and manages a portfolio of mortgage-backed securities that are issued and guaranteed by U.S. government agencies. This caused quite a bit of uncertainty last week with the Standard & Poor’s downgrade of the U.S. Treasury credit rating and the subsequent downgrading of Fannie Mae (FNMA) and Freddie Mac (FMCC).
As it turned out, those concerns were overblown, and shares of Annaly rose 9.42% for the volatile week. I attribute this to the strength of the management team led by Michael Farrell and the company’s excellent risk-management techniques.
Annaly is one of the 20 highest-yielding dividend stocks.
McCormick (MKC) is a pretty boring company. It makes spices, extracts and seasonings under various brand names, including McCormick, Lawry’s, Zatarain’s and Old Bay, for sale to consumers, distributors and food service establishments. As a result, you should not expect the company to experience a great deal of earnings and stock price volatility.
That is indeed the case. The company has consistently beaten Wall Street consensus earnings estimates. While I would like a slightly higher dividend yield, McCormick is still paying out dividends at a rate greater than the S&P 500 average. Last week’s stock price appreciation for McCormick was a spicy 3.32%.
We now have a portfolio of 10 low-volatility stocks, all of which gained in share price last week and all of which pay dividend yield that exceed that of the S&P 500.
-- Written by Scott Rothbort in Millburn, N.J.
At the time of publication, author was long PEP, SO,MO, T and NLY.
Scott Rothbort has over 25 years of experience in the financial services industry. He is the founder and president of LakeView Asset Management, a registered investment advisor specializing in customized separate account management for high net worth individuals. In addition, he is the founder of TheFinanceProfessor.com, an educational social networking site, and publisher of The LakeView Restaurant & Food Chain Report. Rothbort is also a professor of finance at Seton Hall University's Stillman School of Business.
Sources for stock data above: Telemet Orion