The All-Defensive Team: 25 Low Beta Dividend Stocks For An Uncertain Market (Part 1)

|
 |  Includes: AWR, CLX, KO, PAA, VZ
by: Parsimony Investment Research

Summary

Fears of a major correction are rising as stocks continue to hover around all-time highs.

Investors should consider adding low beta dividend stocks to their holdings to help dampen portfolio volatility.

Stocks in "defensive" sectors typically have low relative betas since these companies tend to generate stable cash flow regardless of the state of the economy.

Our 25 All-Defensive Team stocks have an average beta of 0.46 and an average dividend yield of 3.4%.

While it's been a choppy start to the year, some of the major stock market indices continue to hover around all-time highs. That said, there are mixed signals in the bond market and leaders from the stock market rally last year (Small Cap and Technology stocks) have relinquished their pole position recently. This divergence has fueled the growth of the "correction" bandwagon over the past few weeks and we recommend that investors remain cautious for the remainder of the year.

In the current market environment, it is important for income investors 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 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 25 "defensive" dividend stocks with the highest Parsimony Ratings (that also meet the parameters below):

  • Beta (5-year) < 0.70
  • Dividend Yield > 2.5%
  • Parsimony Rating > 75

We will highlight each of these stocks over the course of a 5-part series. Below is a schedule of the entire series. Please make sure to "follow" us so that you will be notified when each new article is published.

  • Part 1: Honorable Mention (stocks #21-25)
  • Part 2: Fourth Team (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: Honorable Mention

Our 25 All-Defensive Team stocks have an average beta of 0.46 and an average dividend yield of 3.4%. This article highlights the 5 stocks that made Honorable Mention (stocks ranked #21-25). The tables below summarize some of the key data points that we analyze when ranking our dividend stocks.

#25 The Clorox Company (NYSE:CLX)

CLX has delivered shareholders a total return of 104% over the past 5 years driven by a compound annual dividend growth rate of 9.1%. CLX has increased its dividend to shareholders every year since 1977. In addition, the stock has had a very modest maximum drawdown during the past recession of 28.4%, which has allowed CLX investors to sleep very well at night.

#24 Plains All American Pipeline (NYSE:PAA)

Plains All American has increased its quarterly distribution to limited partners in 38 out of the past 40 quarters and consecutively in each of the past 19 quarters. That is some impressive dividend growth! Master Limited Partnerships ("MLPs") are not traditionally considered to be "defensive" in nature. However, we believe that the large cap diversified MLPs (like PAA) are very "utility-like" in that they tend to deliver stable and consistent income in any market environment. PAA has a very nice dividend yield (4.5%) and the company has delivered shareholders a 246% total return over the past 5 years!

#23 Verizon Communications (NYSE:VZ)

VZ recently increased its dividend for the six consecutive years in 2013, and we believe that this trend will continue for the company. Telecommunication providers like VZ tend to rate relatively low in Financial Stability and Dividend Sustainability due to the capital intensive nature of their business model. However, VZ generates a very consistent level of free cash flow every year, which is extremely attractive to long-term dividend investors. Also, VZ has a relatively low beta (0.34) and we think that its cash flows are very "utility-like."

#22 American States Water (NYSE:AWR)

AWR is a water utility company that distributes water in the state of California. AWR has paid dividends to shareholders every year since 1931 and it has increased that dividend for 59 consecutive years. Over the past 5 years, the company has grown its dividend at a compound annual rate of 9.4% and delivered shareholders a total return of 117%. AWR is an extremely stable dividend payer that certainly warrants consideration in your DIY Dividend Portfolio.

#21 The Coca-Cola Company (NYSE: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 7.9% and 9.0%, respectively. This has led to a stable dividend growth rate of 8.1% for KO and a total stock return of 99% over that same period.

Summary

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 25 stocks on our All-Defensive Team would make a nice addition to a long-term dividend portfolio.

Disclosure: I am long VZ, AWR, KO. 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.