By Michael Vodicka
Retirees are being confronted with a huge dilemma.
In the past, investors on the verge of retirement could simply shift into fixed-income assets and still generate plenty of income to support a comfortable lifestyle.
Take the 10-Year Treasury note for example, considered the safest asset in the world for being backed by the full credit of the U.S. government.
Just 12 years ago, the yield on these bonds was about 6.7%. That meant an investor with $1 million in retirement savings could generate close to $70,000 of annual income from investing in the U.S. government bonds. And that's not even factoring in capital gains as yields continued to fall and push bond prices higher. It was a powerful combination that set the foundation for many comfortable retirements.
But fast forward to 2013 and things could not be more different.
Now, high-risk fixed-income assets such as the iShares iBoxx $ High Yield Corporate Bond (HYG), an exchange-traded fund ETF that tracks an index of high-yielding bonds, only yields 6.6%, which is low for these so-called "junk" bonds. And the 10-Year note? With a yield of just 1.9%, retirees are starving for yields that could support even a modest income.
That has pushed many yield-hungry retirees into large-cap dividend stocks. The problem is that these large-cap dividend stocks are not as stable as fixed-income assets, especially Treasuries. Even safeblue chips like Coca Cola Co. (KO) and International Business Machines (IBM) are vulnerable to market volatility.
But by adding a very simple metric, retirees who decide to take the plunge into high-yield blue chips can add an extra layer of stability to their portfolios.
I'm talking about beta.
Simply put, beta is a measurement of a stock's stability. A reading of 1 means that a stock should trade mostly on par with the S&P 500, while a stock with a beta of 0.5 means that if the S&P 500 falls 5%, this low-beta stock should only fall about half of that, or about 2.5%. Low-beta stocks traditionally don't have as much kick to the upside, but for investors looking for yield and stability, it's a concession many are happy to make.
Here is a list of nine high-yield, low-beta stocks that can help retirees avoid unwanted market volatility while generating an impressive stream of income. Out of the nine, I like Verizon (VZ) andReynolds American Inc. (RAI) because of their balanced combination of stability, high yield and low beta.
Verizon is a global leader in data and cellular-transmission services with a market cap of $121 billion. Verizon continues to benefit from the bullish trend in mobile devices and data-transmission services, with sales and earnings steadily climbing in the past four years out of the recession of 2008.
That shows up on the chart, where a steady grind higher for the past two years has lowered Verizon's beta to half the S&P 500 at 0.51. Analysts are looking for earnings of $2.82 per share in 2013, good for a 16.5% earnings growth. That has shares trading at 15 times forward earnings, in line with its 10-year average and only a slight premium to the S&P 500. And when you throw in a hefty 4.8% dividend, Verizon is a nice combination of income and stability.
Reynolds American Inc.
Reynolds American manufactures and sells cigarettes and other tobacco products in the United States and has a market cap of $23 billion. With a highly inelastic customer demand that is less sensitive to economic fluctuations than other companies and industries, Reynolds is a popular pick for investors looking for more stability.
Shares of Reynolds have seen steady gains in the past two years, up a market-beating 48% and pushing Reynolds's beta to a highly tempered 0.59. Analysts are looking for earnings of $3.12 per share in 2013, a respectable 6% growth projection. That has shares trading at just 14 times forward earnings, in line with the 10-year average and the S&P 500. And with a dividend yield of 5.6%, Reynolds offers the highest yield on our list.
Risks to Consider: No stock operates in a vacuum. If the market comes under pressure during the debt ceiling debate, low-beta stocks will be down less than high-beta stocks, but they will most likely trade lower.
Dividend stocks are in favor with investors because of their income potential in a very low-yield environment. Dividend stocks also tend to be less volatile than growth stocks, another reason why investors have been attracted to the group. But when you add in a low beta filter, high-yield dividend stocks are the ultimate in income and stability. And with Verizon and Reynolds American looking inexpensive relative to their peers and the market, these two stocks are at the front of the pack.
Additional disclosure: StreetAuthority LLC owns shares of VZ in one or more of its “real money” portfolios.