In three series of articles, we will have an in-depth look at the best defensive dividend stocks helping you to identify some solid dividend stocks with stable earnings and consistent dividend payments. This is part three.
In part one, the focus was on dividend growth and even better earnings per share growth over 10 years. In the second part, the approach was based on dividend growth and outperformance of the S&P 500 during a recession, so recession-proof dividend stocks. In this article, we focus on several dividend stocks with a low beta.
In brief:
- Defensive dividend stocks often provide stable returns regardless of inflation and economic turmoil.
- They could help you to reduce your portfolio’s volatility, a lower beta.
- Defensive stocks are typically well-known brands and so-called value stocks.
- They typically offer higher dividend yields than treasury bills.
A defensive dividend stock is a stock that provides consistent dividend income, stable earnings, and provides consistent returns even during an economic recession or stock market downturn. Conservative and retirement investors often invest in defensive dividend stock to generate income while the lower volatility gives some kind of “peace of mind” as well.
Defensive stocks typically have strong cash flows and products or services that have constant demand and are usually found in one of the following four sectors:
- Utilities: companies active in electric, gas, water, and waste. For example Atmos Energy (ATO) or Waste Management (WM)
- Consumer staples: includes manufacturers and distributors of food, beverages, and tobacco. For example Coca-Cola (KO) or Procter & Gamble (PG)
- Healthcare: companies active in healthcare. For example Johnson & Johnson (JNJ)
- Telecom: consists of companies that transmit data in words, voice, audio, or video across the globe, so AT&T (T).
Those four sectors continue to operate “as usual” through economic downturns, allowing the companies to generate sufficient cash flows to maintain dividend payouts.
The main advantages of defensive dividend stocks are their stability with respect to lower volatility than the overall stock market and outperformance during economic decline. Furthermore, dividend growth could provide some inflation protection as well. On the flip side, the mentioned advantages will in most cases result in underperformance in periods of strong economic growth.
A typical characteristic of defensive stock is a beta below one. Beta measures the responsiveness of a stock’s price to changes in the overall stock market (volatility). A stock with a beta of 0.7 has experienced gains and losses that are 70% of the benchmark’s changes. For example, Johnson & Johnson (JNJ) has a beta of 0.71 and Coca-Cola (KO) around 0.6 at the moment of writing.
Here are some more details on how to interpret betas:
- A beta of 1.0 means the stock moves equally with the Index (e.g. S&P 500)
- A beta of 2.0 means the stock moves twice as much as the index
- A beta of 0.1 means the stock almost doesn’t correlate with the index.
- A negative beta means the stock moves opposite the index
In our screeners, we use the following ranges:
- Beta >1.1 means high
- Beta between 0.8 and 1.1 means average
- Beta between 0.5 and 0.8 means low
- Beta < 0.5 means very low
To calculate the beta of a stock, the covariance between the return of the security and the return of the market must be known, as well as the variance of the market returns.
Beta = covariance / variance
The chart below displays the performance of Walmart with a beta around 0.7 and Boeing with a beta well above 1.3.
A good source for dividend stocks are the dividend kings and dividend aristocrats. Next to low beta scores, they also offer dividend growth and attractive dividend yields. So, here are the “top 10” low beta stocks from both lists with the lowest betas.
Dividend Aristocrats
Dividend Kings
Defensive Dividend stocks can help you preserve wealth and protect yourself against losses during a recession. The companies identified have strong business models (wide-moat), solid balance sheets, and the ability to grow their dividends in all types of economic conditions. They are candidates worth considering as part of a diversified portfolio to help you sleep well at night. This should give you confidence that your passive income is as safe (as it can be) and will likely keep growing your wealth over time.
The stocks mentioned do not only offer low beta scores, but they also offer dividend growth and attractive dividend yields.
