If you are currently retired or getting close to retirement age, building a portfolio that generates stable income is probably your primary focus right now. That said, it's extremely important for retirees to stick to an investment plan that balances risk and reward.
High debt levels, stagnant employment, and the slow housing recovery are still very much a reality. In addition, interest rates are expected to remain near zero for the foreseeable future and income investors will have to continue to scramble for safe yield.
In the current market environment, it is important for retirees to choose their dividend stocks wisely as they are putting new money to work. As volatility increases (especially downside volatility), investors may want to add some low beta stocks to their holdings to help dampen portfolio volatility. In general, companies with low betas will tend to be less volatile than the general market.
Low Beta Dividend Stocks For Your Retirement Portfolio
Stocks in "defensive" sectors (like consumer staples, healthcare, and utilities) typically have low relative betas since these companies tend to generate stable cash flow regardless of the state of the overall economy.
That said, we scanned our entire dividend stock universe and came up with our "All-Defensive" Team. This team is made up of 20 "defensive" dividend stocks with the highest Parsimony Ratings (that also meet the parameters below):
- Stock Price > $10.00
- 3-Month Avg. Volume > 250,000 shares
- Beta (5-year) < 0.60
- Dividend Yield > 2.5%
- Parsimony Rating > 80
We will highlight each of these stocks over the course of a 4-part series. Below is a schedule of the entire series.
- Part 1: Honorable Mention (stocks #16-20)
- Part 2: Third Team (stocks #11-15)
- Part 3: Second Team (stocks #6-10)
- Part 4: First Team (stocks #1-5)
The All-Defensive Team: Second Team
Our 20 All-Defensive Team stocks have an average beta of 0.42 and an average dividend yield of 3.4%. This article highlights the 5 stocks that made the Second Team (stocks ranked #6-10). The tables below summarize some of the key data points that we analyze when ranking our dividend stocks.
#10 Verizon Communications (NYSE:VZ)
Verizon recently increased its dividend for the six consecutive year and we believe that this trend will continue for the company. Telecommunication providers like Verizon tend to rate relatively low in Financial Stability and Dividend Sustainability due to the capital intensive nature of their business model. However, Verizon generates a very consistent level of free cash flow every year, which is extremely attractive to long-term dividend investors. Also, Verizon has a relatively low beta (0.44) and we think that its cash flows are very "utility-like."
#9 The Clorox Company (NYSE:CLX)
The Clorox Company has delivered shareholders a total return of 68% over the past 5 years driven by a compound annual dividend growth rate of 10.8%. Clorox has increased its dividend to shareholders every year since 1977. In addition, the stock has had a very modest maximum drawdown over the past 5 years of 28.4%, which has allowed investors to sleep very well at night.
#8 Kinder Morgan Energy Partners (NYSE:KMP)
Master Limited Partnerships ("MLPs") are not traditionally considered to be "defensive" in nature. However, we believe that the large cap diversified MLPs are very "utility-like" in that they tend to deliver stable and consistent income in any market environment. For example, Kinder Morgan has increased its dividend at a compound annual rate of 7.4% over the past 5 years, while delivering shareholders a total return of 108%. In addition, the company has a low beta (0.41) and it had a relatively small maximum drawdown (28.0%) during the recession (which is why its Risk/Reward Rating (97) is so high). Also, the stock has a very attractive dividend yield of 5.9%.
#7 Baxter International (NYSE:BAX)
Back in July, Baxter increased its quarterly dividend by 34% (from $0.335 to $0.45). The company has a high Financial Stability rating (89) and it has a strong track record of returning significant value to shareholders in the form of dividends and share repurchases. Over the last five years (2007-2011), Baxter has generated an average of $2.7 billion in cash flow annually and has returned more than $11.4 billion cumulatively to shareholders through dividends and share repurchases.
#6 Bristol-Myers Squibb (NYSE:BMY)
While Bristol-Myers Squibb's dividend growth rate has been relatively modest over the past 5 years (4.0%), the company has delivered shareholders a total return of 100% over that time period. In addition, the stock has a very attractive dividend yield (3.8%) and we think that it is a great long-term hold for DIY dividend investors.
If you are looking to generate safe and stable income in a volatile market environment, low beta dividend stocks in defensive sectors are a great way to accomplish this goal.
Please make sure to "follow" us as we continue this series and unveil the dividend stocks that made our first "All-Defensive" Team.
Disclosure: I am long VZ, KMP, BMY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.