In an economic downturn many investors turn to dividend stocks which are sometimes referred to as defensive stocks. These stocks offer sustainable dividends providing the investor with a minimum level of positive return, which helps buffer the downward pressure from the market. But what happens when the market turns up?
Beta: A Measure of Volatility
Beta (β) is a quantitative measure of the volatility of a given security or portfolio relative to the overall market, usually the S&P 500. By definition, the market has a beta of 1.0 and securities are ranked according to how much they deviate from the market. Thus, securities with a beta above 1 are more volatile than the overall market, while those with a beta below 1 are less volatile. High-beta stocks are considered more risky, but provide a potential for higher returns. Low-beta stocks normally provide less risk and lower opportunities for capital gains.
Betas And Dividend Stocks
Dividend stocks tend to have low betas. That means during a market downturn, they tend to decline less than the total market. Hence, the term defensive stocks. It is also important to note that many defensive stocks are non-cyclical. Examples would include food, tobacco, oil, and utilities where demand is remains stable under difficult economic conditions.
Here are several dividend stocks with betas (as provided by Google Finance) less than 1.00:
Company Analysis Beta % Yield Cardinal (CAH) Link 0.80 2.35 AT&T (T) Link 0.68 6.83 Meridian (VIVO) Link 0.63 3.63 Coca-Cola (KO) Link 0.60 3.41 Becton, Dickinson (BDX) Link 0.58 2.06 Procter & Gamble (PG) Link 0.58 3.12 Johnson & Johnson (JNJ) Link 0.57 3.54 Kimberly-Clark (KMB) Link 0.48 4.29 Harleysville Group (HGIC) Link 0.38 4.15 Wal-Mart (WMT) Link 0.24 2.36 Abbott Laboratories (ABT) Link 0.18 3.69
When the market turns up, low beta stocks normally won’t increase as fast as the market in total. However, as a long-term dividend investor, my goal is an ever-increase stream of dividend income, not to maximize capital appreciation.
Full Disclosure: Long ABT, HGIC, JNJ, KMB, KO, PG, T, WMT. See a list of all my income holdings here.