Low Volatility Stocks: The Hidden Gems for Stable Returns
The Secret of Low Volatility Stocks:
Low volatility stocks refer to those that experience less price fluctuation compared to the broader market. This does not mean they never fluctuate, but rather that they are more stable. Investors flock to these types of stocks when they are looking for consistency and are less concerned with the rapid price movements of growth stocks.
To understand their appeal, let’s break it down. Consider the following table, which compares the average volatility of different stocks in varying sectors:
| Sector | Average Volatility (%) | Example Stock |
|---|---|---|
| Technology | 25 | Apple, Inc. (AAPL) |
| Consumer Staples | 12 | Procter & Gamble (PG) |
| Utilities | 10 | NextEra Energy (NEE) |
| Healthcare | 15 | Johnson & Johnson (JNJ) |
| Financial Services | 20 | JPMorgan Chase (JPM) |
The consumer staples and utilities sectors, which tend to house low volatility stocks, are marked by their stability. These sectors deal with products and services that people need regardless of the economic climate, such as food, healthcare, and electricity. Even in the worst recessions, people will still buy toothpaste and pay their electricity bills. This helps explain why stocks from these sectors show less dramatic price swings.
Why Should You Care?
In the wake of the 2008 financial crisis and the economic turbulence brought about by COVID-19, investors have been increasingly focused on minimizing risk. Low volatility stocks provide a "sleep well at night" option, particularly during market downturns. If you're nearing retirement or simply can't stomach the extreme ups and downs of high-growth stocks, these stocks are a fantastic addition to your portfolio.
But what about the returns? While the growth potential might not be as explosive as with high-volatility stocks, these companies often provide consistent dividends. Over time, these dividends can create a compound effect, where reinvested dividends generate even more earnings.
The List: Top Low Volatility Stocks for 2024
Let’s get down to what you came here for: the stocks that will give you that peace of mind.
| Stock Name | Ticker Symbol | Sector | Dividend Yield | 5-Year Avg. Volatility (%) |
|---|---|---|---|---|
| Procter & Gamble | PG | Consumer Staples | 2.5% | 12 |
| Johnson & Johnson | JNJ | Healthcare | 2.6% | 14 |
| NextEra Energy | NEE | Utilities | 2.2% | 11 |
| Coca-Cola | KO | Consumer Staples | 3.0% | 10 |
| Walmart | WMT | Retail | 1.6% | 13 |
| PepsiCo | PEP | Consumer Staples | 2.7% | 11 |
| Merck & Co. | MRK | Healthcare | 3.0% | 14 |
| Verizon Communications | VZ | Telecommunications | 4.5% | 15 |
| Duke Energy | DUK | Utilities | 4.0% | 9 |
| McDonald’s | MCD | Consumer Discretionary | 2.3% | 13 |
These stocks have shown the ability to weather economic storms with minimal price volatility. Investing in such companies gives you a chance to build a more stable portfolio while still receiving regular dividends. Let’s examine why these specific stocks are often chosen for low volatility portfolios.
1. Procter & Gamble (PG):
Procter & Gamble has consistently performed well, even in times of economic turmoil. Their wide range of essential consumer products—spanning from cleaning supplies to personal hygiene items—makes them an attractive pick. It’s hard to imagine a scenario where people stop buying toothpaste or laundry detergent.
2. Johnson & Johnson (JNJ):
Healthcare is often seen as recession-proof, and Johnson & Johnson is a leader in both consumer healthcare products and pharmaceuticals. The company’s diversity helps to balance its exposure to risk, making it a favorite among low-volatility investors. Its 2.6% dividend yield isn’t too shabby either.
3. NextEra Energy (NEE):
Utilities tend to be stable because people need electricity, no matter the economic environment. NextEra Energy stands out in the utilities sector due to its forward-thinking approach to renewable energy, making it both a stable and innovative option.
4. Coca-Cola (KO):
Coca-Cola has been around for over a century, and it isn’t going anywhere anytime soon. The company’s global footprint and dominance in the beverage industry make it a staple for any low-volatility portfolio. Plus, with a 3.0% dividend yield, you’re earning while you wait.
5. Walmart (WMT):
Walmart thrives in any economy because it offers affordable products. In tough times, people turn to Walmart for bargains, which means the stock performs well even when others are struggling.
6. PepsiCo (PEP):
Similar to Coca-Cola, PepsiCo has a diversified portfolio of beverages and snack foods that people continue to purchase regardless of the economic situation. The company’s consistent dividend and low volatility make it a top choice.
7. Merck & Co. (MRK):
Merck is a pharmaceutical giant with a diverse range of products. The healthcare sector’s relative insulation from economic downturns makes Merck a great low-volatility stock. With a 3.0% dividend yield, it provides both stability and income.
8. Verizon Communications (VZ):
Telecommunication companies like Verizon are seen as essential, especially in a world increasingly reliant on the internet. While it may not see explosive growth, the company’s 4.5% dividend yield is a major draw for income-focused investors.
9. Duke Energy (DUK):
Another utility giant, Duke Energy, provides electricity to millions of customers. Utilities are known for their steady income streams, and Duke’s 4.0% dividend yield makes it a strong contender for low volatility portfolios.
10. McDonald’s (MCD):
Even when people tighten their belts, they still indulge in fast food. McDonald’s has proven its resilience through recessions, and its ability to adjust its menu and services (e.g., through delivery partnerships) keeps it relevant. Its stability and reasonable dividend yield make it an excellent addition to any portfolio.
The Low Volatility Anomaly
One interesting concept when discussing low volatility stocks is the "low volatility anomaly." This refers to the idea that, contrary to conventional financial wisdom, lower volatility stocks have historically outperformed their higher-volatility counterparts over the long term. In theory, investors should be compensated with higher returns for taking on more risk, but the reality often shows that the tortoise (low volatility stocks) can indeed beat the hare (high volatility stocks).
Crafting Your Low Volatility Portfolio
If you're ready to build your own low-volatility portfolio, keep these points in mind:
Diversify across sectors. Don’t just load up on utility stocks. While they are stable, diversifying across sectors (e.g., healthcare, consumer staples, telecommunications) will help further reduce risk.
Focus on dividend payers. Many low volatility stocks offer dividends, which provide a steady income stream. Reinvesting these dividends can compound your returns over time.
Stay patient. Low volatility stocks are not designed for fast gains. The goal here is slow, steady growth with minimal losses during downturns. Over time, this can add up to significant wealth.
Final Thoughts
Low volatility stocks are an underappreciated asset class. While they won’t make you rich overnight, they offer stability and the potential for steady, long-term growth. Whether you're nearing retirement, seeking to diversify a riskier portfolio, or just looking for a reliable source of dividends, these stocks should be on your radar.
What do you prefer: a thrilling, volatile roller coaster ride or a smooth, steady journey to financial security? For those who choose the latter, low volatility stocks are the way to go.
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