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.
The "kicking the can down the road" nonsense in Washington will likely continue to add uncertainty to the market for years to come. The current Fed-induced rally has expanded P/E multiples across the board and the markets continue to be priced for perfection. 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 recently scanned our entire dividend stock universe and came up with our current "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 > 75
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: Third Team
Our 20 All-Defensive Team stocks have an average beta of 0.44 and an average dividend yield of 3.6%. This article highlights the 5 stocks that made the Third Team (stocks ranked #11-15). The tables below summarize some of the key data points that we analyze when ranking our dividend stocks.
#15 Coca-Cola Company (KO)
KO has paid a quarterly dividend since 1920 and has increased dividends in each of the last 50 years. Over the past 5 years, KO has steadily grown its revenues and earnings at a compound annual rate of 8.6% and 9.0%, respectively. This has led to a stable dividend growth rate of 8.2% for KO and a total stock return of 118% over that same period.
#14 Reynolds American (RAI)
RAI has a very high Risk/Reward Rating (96) and the company has delivered shareholders a total return of 197% over the past 5 years driven by a very nice dividend yield of 5.0% and a compound annual dividend growth rate of 9.6%. RAI generates a significant amount of cash (35%+ EBITDA margin) and we expect that the company will continue to grow its dividends in the future.
#13 Clorox Company (CLX)
CLX has delivered shareholders a total return of 89% over the past 5 years driven by a compound annual dividend growth rate of 9.6%. CLX 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 CLX investors to sleep very well at night.
#12 Johnson & Johnson (JNJ)
JNJ has a solid dividend yield of ~3.0% and it has grown its dividend for 50 consecutive years, including a compound annual growth rate of 11.3% over the past 10 years. JNJ also has a strong balance sheet with very little debt (as highlighted by its Financial Stability Rating of 92).
#11 Owens & Minor (OMI)
OMI may not be on your radar, but it should be. As shown in the graph above, OMI has consistently increased its dividend at a compound annual rate of 15.4% over the past 10 years. This kind of chart is exactly what you want to see from your dividend stock. In addition, the company has a strong rating for financial stability (79) and we expect this dividend trend to continue.
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. We believe that any of the 20 stocks on our All-Defensive Team would make a nice addition to a retirement portfolio.