Bear markets, such as 2022, generally leave investors with places to hide. Most stocks are priced with a certain level of growth in mind, and so when fears of a recession or higher interest rates hit, most stocks move lower. However, there are some stocks that have diversified portfolios that tend to move apart from the broader market.
One way to measure this diversification component is through beta, which is a measure of a security’s volatility relative to its benchmark. In this case, we can measure a stock’s beta against the S&P 500, which gives a measure of the volatility of each stock based on simply owning the S&P 500 through an index fund.
With that in mind, let’s take a look at three stocks that not only have low beta values, but also high dividend yields. This combination of factors makes them attractive to hold in bear markets.
Our first stock is McDonald’s (MCD), the ubiquitous owner and franchisor of McDonald’s restaurants in the United States and internationally. The chain offers popular sandwiches, fries, drinks, sides and more. It operates or franchises about 40,000 stores globally, only a small number of which are company-owned.
McDonald’s was founded in 1940, has annual revenues of approximately $23 billion and trades at a market capitalization of $200 billion.
McDonald’s stock has a five-year beta of 0.65, which means it moves in the same direction as the S&P 500 over the long term, but by 65% of the magnitude. In practice, this means that theoretically, if the S&P 500 falls 10%, McDonald’s is expected to fall 6.5%.
In practice, McDonald’s is up about 1% year to date in 2022, while the S&P 500 is down 17%. This is the power of holding diversifying stocks with low beta values.
McDonald’s also has a very impressive 47-year dividend growth streak, which is rare for a company of this size. The payout ratio is currently just over 60% of earnings, so the dividend is very safe given the company’s reliable revenue and earnings. The yield is currently 2.2%, which is about 60 basis points better than the S&P 500.
We also expect 6% annualized earnings growth for the foreseeable future, meaning McDonald’s should have plenty of runway to continue raising its dividend for many years to come.
Finally, even though McDonald’s operates in a generally very cyclical sector — restaurants — its strong position and value proposition mean that its earnings hold up better than most of its peers during downturns. In fact, during downturns, McDonald’s tends to gain share given its value proposition, so even in a downturn, we see McDonald’s as a strong performer.
“Sanitize” Your Portfolio
Our next shareholder, Clorox (CLX), is a company that manufactures and distributes many consumer and professional cleaning products worldwide. The company operates in four segments: Health & Wellness, Household, Lifestyle and International. Through these segments, Clorox distributes its namesake Clorox cleaning products, but also other cleaning products, nutritional products, vitamins and supplements, as well as pet supplies and more.
Clorox was founded in 1913, generates about $7.1 billion in annual revenue, and has a current market value of just over $18 billion.
Clorox’s five-year beta is just 0.29, meaning it tends to move largely independently of the S&P 500. Therefore, it provides significant diversification to the stock portfolio, which is especially beneficial during bear markets. So far in 2022, Clorox has matched the S&P 500 with a price return of about -16%.
Clorox also has a dividend streak approaching 50 years, meaning it’s also exemplary when it comes to dividend longevity. The company’s payout ratio is actually outpacing earnings this year, but that should be temporary. Clorox had a boom to the pandemic, and it opened up to some extent. We see normalized earnings in the coming years, as earnings growth of 12% from current lows should make dividends more sustainable again.
Clorox yields 3.2% today, nearly double the S&P 500, so it’s a strong income stock.
After all, Clorox sells mostly core products, meaning recessions do little to dampen demand. This means it holds up well during bear markets and recessions.
A Dividend King in Waiting
Our final stock is Walmart (WMT), the popular value leader in general retail. The company’s stores number more than 10,000 globally, and they collectively provide hundreds of millions of people each year with groceries, pantry items, household, automotive and garden products and more.
Walmart was founded in 1945, has annual revenues of $600 billion and trades at a market value of $417 billion.
Walmart’s five-year beta versus the S&P 500 is 0.53, so it’s between McDonald’s and Clorox in terms of diversification impact. Walmart is up 6% this year, outperforming the S&P 500 by about 23% in 2022.
The company has a 49-year dividend growth streak and we expect the company’s next dividend announcement to make it the Dividend King. The payout ratio is quite low at only 38%, so there is likely to be many years of growth ahead of the dividend. We also see 8% earnings growth in the coming years, meaning Walmart will be a strong dividend growth fund in the years to come.
The yield is about the same as the S&P 500, so it’s not a pure income fund like, say, Clorox.
Finally, Walmart is well-known in the investment community for its resilience to recessions, given that it has the highest value proposition when it comes to physical retail. The company’s low cost strategy means it holds up well in any economic environment.
While bear markets can be difficult to navigate, there are strategies investors can use to minimize the negative effects. Finding large dividend stocks with low betas, such as McDonald’s, Clorox and Walmart, can provide investors with a safe haven of low volatility and income.
As an example, in 2022 these three stocks would return -3%, excluding dividends in equal parts, yielding 2.3%. These percentages compare quite favorably with the S&P 500’s price return of -17% and yield of 1.6%. Such is the power of low-beta stocks, and we like these three during a tough bear market in 2022.
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