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Is there really such a thing as a safe stock? When you buy a share, you own a tiny piece of a business, and any business can develop problems no one suspects.
Consider Enron, a consistent money-maker in energy trading, which went from $90 a share to 26 cents in a little over a year. Or Sears, once a solid retail giant and now reduced to just a handful of stores. Eastman Kodak, Polaroid and Blockbuster were all solid citizens that went bankrupt.
No stock is safe in the sense that a short-term Treasury bill is safe. But looking at a firm’s business, its longevity and the performance of its stock in the past, we can make educated guesses about which stocks are likely to provide relatively smooth sailing and limited anxiety.
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Consistency beats excitement when it comes to safe stocks
Begin by examining volatility — the extremes of the ups and downs of a stock’s price. Volatility and risk are closely related. A stock that shoots up 80% one year and then falls 35% the next is considered far more risky than a stock that returns 8% in both years — even though both stocks return almost precisely the same over the two years.
Market analysts use a measure called beta to determine the volatility of a stock compared with that of the market over a given period. A beta of 1.0 means a stock’s volatility is equal to the market’s. A beta lower than 1.0 means it’s less volatile; higher than 1.0, more volatile.
For example, Johnson & Johnson (JNJ), which has been making pharmaceuticals and other medical products since 1886, has a beta of just 0.35, meaning its stock has been 65% less volatile than the market over the past five years.
During that period, shares have traded in a narrow band, between about $140 and $180, before breaking out in August and climbing above $200. Key metrics, including sales and earnings per share, have risen annually, with only a few brief dips over the past decade. The balance sheet is impressive. (Stocks I like are in bold; prices and other data are as of December 31, unless otherwise noted.)
The drawback: Value Line projects profits will rise only 5.0% on average for the next five years. Still, if it’s safety you’re after, this is the right company. Johnson & Johnson has been ordered to pay billions after being hit with massive lawsuits over claims its powder was linked to cancer, but the company is so sturdy that what would have been a tsunami for some firms caused only a few waves.
Nasdaq provides a valuable list of stocks with the lowest beta. Besides J&J, I like CME Group (CME), the former Chicago Mercantile Exchange, which profits as trading increases; it has a beta of just 0.29.
Sporting a 0.38 beta is Procter & Gamble (PG), the packaged-goods giant with probably the best brand lineup in the U.S., including Pampers, Tide and Gillette.
Most large electric utility companies have a low beta, and with rising demand for power, they are gaining new followers. One of the best is Atlanta-based Southern (SO), which also owns extensive natural gas pipelines; it has a beta of 0.44.
I am especially fond of Pepsico (PEP), with a beta of 0.42 and earnings that have risen in what I call a beautiful line, dipping slightly in just two of 10 years from 2014 through 2024.
Pepsico is a purveyor of soft drinks and snacks, with such brands as Gatorade and Frito-Lay in addition to its eponymous 132-year-old cola drink. Low volatility does not guarantee big gains for investors, and Pepsico has returned just 13% cumulatively over the past five years, compared with 96% for the S&P 500. But its robust dividend yield makes the consumer staples stock particularly attractive for the long term.
A dividend payout that increases year after year is another sign of relative safety. Businesses hate to lower dividends, so they raise them only when they’re sure they see profits ahead. Currently, 69 stocks are termed Dividend Aristocrats, meaning they have increased their payouts for at least 25 years in a row. For Johnson & Johnson, the string is 63 years; for Procter & Gamble, 69 years.
Dividends create a plump safety cushion for investors
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S&P Global calculated that since 1989, the Dividend Aristocrats have beaten the S&P 500 a little more than half the time. But in months when the market was down, the Aristocrats outperformed two-thirds of the time.
An exchange-traded fund that owns all such stocks, the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), has been a poor performer over the past five years, returning an annual average of 7.7% — a little more than half the return of the full large-cap index, which is now dominated by huge tech stocks. But times change.
Among the Aristocrats I find enticing are Fastenal (FAST), a wholesale distributor of mundane industrial supplies such as nuts and bolts, which has boosted its dividend for 26 straight years and has a beta of 0.88, and McDonald’s (MCD), with a streak of 49 years and a beta of 0.52.
Chubb (CB), with a strong reputation as an insurer of upscale customers, has more than doubled in the past five years but also has a low valuation, a 32-year streak of higher dividends and a beta of 0.52.
Although many mutual funds have been chasing hot tech stocks, others lean toward safety. Dodge & Cox Stock (DODGX) – a member of the Kiplinger 25, our favorite no-load mutual funds – has managed a five-year average annual return of 13.3% even though its top tech holding, Microsoft (MSFT), ranks 10th among its assets.
Number one is the broker Charles Schwab (SCHW), and second is the aerospace and defense contractor RTX (RTX). Each has a beta below 1.0. Both stocks qualify as almost safe, an accolade that cuts across nearly all sectors — including technology, where International Business Machines (IBM), with a beta of 0.69 and 30 consecutive years of rising dividends, makes the grade.
No tour of the lower-risk horizon is complete without a recommendation of one of my all-time favorite funds, Voya Corporate Leaders (LEXCX), established in 1935 as a portfolio that doesn’t change unless a stock leaves the exchange.
The fund has grown top-heavy, with Union Pacific (UNP) and Berkshire Hathaway (BRK.B) representing more than half of assets. Corporate Leaders (originally run by Lexington) also has several integrated energy stocks, including Chevron (CVX), with a beta of 0.67, that qualify as almost safe in my book.
I can’t tell you whether stocks are headed for trouble in the months ahead. Certainly, there are big questions about whether investors have become too optimistic about the prospects of AI-related businesses, or whether Washington policy decisions, such as high tariffs, will boost future inflation and slow economic growth.
It’s understandable to be looking for safer ports in anticipation of rough weather ahead. To invest is to endure risk, but you can lower the overall riskiness of your portfolio by adding stocks and funds like these.
James K. Glassman chairs Glassman Advisory, a public-affairs consulting firm. He does not write about his clients. His most recent book is Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence. He owns none of the securities listed here. You can reach him at [email protected].
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.