by Matt Doiron
A stock's beta measures how much its price tends to fluctuate in line with market indices; higher beta stocks tend to outperform during bull markets, but underperform during recessions when markets tumble. Income investors sometimes avoid many high yield stocks solely because they tend statistically to rise and fall with the overall market, instead preferring names which are less sensitive to economic conditions. It's also common to take into account the size of a company when evaluating its vulnerability to bear markets- better capitalized, more "blue chip" companies tend to be safer in these times. Using data from Fidelity, here are five stocks which pay dividend yields of at least 3%, have a market capitalization of at least $25 billion, and feature beta statistics of 0.3 or lower:
Leading our list is McDonald's (MCD), a common example of a recession proof stock. Indeed, the beta here is only 0.3. However, market optimism on the quick service restaurant industry- even assigning a small discount to McDonald's by virtue of its much lower growth rates- has priced the stock at 18 times trailing earnings. With net income up only 4% last quarter compared to the second quarter of 2012, that does not seem too attractive from a value perspective. The restaurant does pay a dividend yield of 3.1%.
We track quarterly 13F filings from hundreds of hedge funds and other notable investors, using the included information to help us develop investment strategies (for example, the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year). We can see from our database that the Bill and Melinda Gates Foundation Trust owned 9.9 million shares of McDonald's at the end of March (check out more stocks the trust owns).
One popular industry for income or dividend investors is telecommunications. Verizon (VZ) shows why this is the case: it currently makes quarterly dividend payments of 51.5 cents per share, which comes out to an annual yield of 4%. It also trades fairly independently of economic conditions, with a beta of 0.3, as phone / Internet / cable service is generally considered a necessity among households. Recent results show growing revenue and earnings, though investors should be aware that Verizon may soon buy out Vodafone's minority stake in Verizon Wireless (or even acquire the whole company) to gain total ownership over this asset.
Personal products company Kimberly-Clark (KMB), whose brands include Kleenex and Huggies, features a beta of zero- complete independence, in statistical terms, from macro conditions. At current prices and dividend levels Kimberly-Clark pays a dividend yield of 3.3%. However, markets have latched on to these attractive characteristics and bid up the price such that the stock trades at 21 times trailing earnings. With earnings rising only 6% in the second quarter of 2013 versus a year earlier, that would seem to be an aggressive valuation for the stock and so investors may want to consider the possibility of capital losses on an investment here.
Another stock meeting our criteria is pharmaceutical company Bristol-Myers Squibb (BMY). It too is expensive in earnings terms, with a forward P/E of 22, and recent reports have shown at least a temporary decrease in both sales and profits. Earnings per share were 69 cents in the first half of the year, compared to $1.02 a year ago. While it does offer a decent dividend yield and has little market exposure, we would note that the payout ratio is quite high and so we would avoid it. Renaissance Technologies reported a position of 14 million shares in Bristol-Myers Squibb in its most recent 13F; that fund was founded by billionaire Jim Simons (find Renaissance's favorite stocks).
As might be expected, several utilities are characterized by high yields and low betas. For example, electric utility Southern (SO) has a beta of essentially zero and with a recent increase in the dividend the annual yield is now 4.5%. The company, which as might be expected from its name operates in four states in the U.S. South, recently booked a special item related to a writedown, and even adding that back there was a small decrease in operating income. The forward P/E is 15; due to high regulation there is little latitude for EPS growth but at that valuation the company should be able to support its current yield.