The stock market continues its downward trend, punctuated by occasional up days. For example, the Dow Jones Industrial Averages (DJIA) is down about eight weeks in a row, the most extended streak since 1932. In addition, the Nasdaq is in a bear market, while the S&P 500 Index is close to one. Consequently, many investors are hunkered down and sitting on cash. Yet still, on a relative basis, dividend growth stocks are performing well. In addition, the group contains many low volatility stocks that can provide some respite from the ups and downs of a rough market.
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Performance of Stock Groups
According to Stock Rover*, the performance of the major indices and dividend growth investing stock groups as of this writing.
|Index, Exchange, or Stock Group||Performance (YTD)|
The table illustrates that a dividend growth investing strategy is performing relatively well.
5 Low Volatility Stocks
Procter & Gamble
Proctor & Gamble (PG) should be on the watch list of every dividend growth investor. The household products giant has 21 $1+ billion brands, including Tide, Pantene, Olay, Old Spice, Secret, Gillette, Pampers, etc.
The 1-year beta is 0.42, less than the industry average in the broader market. Proctor & Gamble provides stability when growth or momentum stocks plunge. The stock price is only down about (-8.7%) year-to-date (YTD).
P&G has 66 years of continuous dividend growth, making the stock a Dividend King and one with the 5th longest dividend streak. The dividend growth rate has been about 5.2% per year in the past decade. P&G is yielding 2.52%, below its 5-year average.
The dividend payout ratio is 60%, below our target value of 65%, meaning it’s reasonably conservative. However, the rock-solid balance sheet and its recession resistance make it one of the safest Dividend Kings to own.
P&G is rarely undervalued and is trading at a forward price-to-earnings (P/E) ratio of ~24.8X.
In our search for low volatility stocks, Hormel (HRL) is arguably one of the best choices. The company is one of the few focusing on branded proteins. Major brands include Hormel, Black Label, SPAM, Skippy, Applegate, Justin’s, Columbus, etc.
The 1-year beta is a minuscule 0.09, meaning the stock is barely correlated to the broader market. So, for example, in a year when most companies’ stock prices are down, Hormel’s stock price is up 1.7%.
Hormel is another Dividend King with 56 straight annual increases. The dividend growth rate is about 14% in the past decade but has slowed to roughly 10.5% in the trailing 5-years. The forward dividend yield is approximately 2.15%, above the 5-year average of 2.0%.
The dividend payout ratio is only 58%, an excellent value. Hormel usually has little-to-no debt except when it acquires a business, like Planters. The current leverage ratio is ~1.2X, and interest coverage is more than 24X. Hormel is another very safe Dividend King.
Hormel is trading at an earnings multiple of about 25.1X, and investors may want to wait for a better entry point.
International Business Machines
International Business Machines (IBM) is a stock most investors loved to hate in the past decade. The company had declining revenue for years until recently. However, the monopoly in mainframes, combined with software and consulting has allowed IBM to generate recurring revenue.
The 1-year beta is about 0.48. IBM’s stock price is up about 2.5% in the year, much better than many other stocks and the broader market indices.
IBM is a Dividend Champion and Dividend Aristocrat with 27 years of dividend increases. Additionally, IBM has paid a dividend for more than 100 years, making it one of the longest paying dividend companies in the US. However, high net debt and leverage have lowered the dividend growth rate to under 1% in recent years.
The forward dividend yield is about 4.9% making IBM a solid income stock. Dividend coverage has improved over the past two years, and the payout ratio is now 68%. In addition, IBM is gradually paying down debt, adding to the dividend safety.
IBM is trading at a low valuation of 13.4 times earnings.
The following stock on this list is Chubb (CB), the big, global personal & casualty (P&C) insurer. The company is the world’s largest insurer.
Chubb’s stock is not as volatile as the market, with a 1-year beta of 0.72. Chubb’s stock is outperforming the market with a gain of 8.1% YTD. Chubb benefits in a period of rising interest rates because its enormous balance sheet generates more income. The fixed-income assets will pay more investment income. Net investment income was a record $3.7 billion in 2021 and will probably be higher in 2022 if interest rates rise further in response to high inflation.
Chubb has raised the dividend for 29 years, making the company a Dividend Aristocrat. Chubb has paid a dividend for 100+ years too. The dividend growth rate is about 3% annually in the trailing 5-years.
The forward dividend yield is roughly 1.5%, below the 5-year average of 2.2%. However, the dividend is more than covered by earnings, with a payout ratio of about 25%.
Despite the positive returns, Chubb’s earnings multiple is 13.7X, within the range of the past 5-years.
Coca-Cola (KO) is the fifth stock on this list. The company is the world’s largest non-alcoholic beverage company. Coca-Cola has an estimated 20% – 21% global market share ahead of the next leading competitor. In addition, the company has multiple leading brands, including Coca-Cola, Diet Coke, Fanta, Dasani, Sprite, Gold Peak, Minute Maid, PowerAde, Body Armor, Costa Coffee, etc.
Coca-Cola has long been known as a low volatility stock. The trailing 1-year beta is 0.48. The company has performed well in a rough market, and the stock price is up 9.0% YTD. Despite supply chain constraints and input inflation, Coca-Cola has raised prices and reported good results.
Coca-Cola is another well-known Dividend King with 60-years of annual dividend increases. Additionally, Coca-Cola is another stock that has paid a dividend for more than 100 years. The dividend growth rate has slowed in recent years but is still at about 3.7% in the past 5-years.
The forward dividend yield is now 2.75%, below the 5-year average of 3.2%. The payout ratio is on the higher end at approximately 72%. However, Coca-Cola has relatively predictable earnings and free cash flow, adding to the dividend safety.
Coca-Cola’s stock is trading at a P/E ratio of 25.9X, above its 5-year range. The stock is rarely undervalued, but it is a favorite of Warren Buffett, and Berkshire Hathaway (BRK.A, BRK.B) owns about 9.2%.
Thanks for reading 5 Low Volatility Stocks in a Rough Market.
Disclosure: Long HRL, IBM, KO
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