You may be familiar with the term “beta,” which is used to compare the volatility of a stock’s price to its underlying index.
If the S&P 500 falls 10% and stock ABC falls 10%, ABC would have a beta of 1. If the S&P fell 10% and stock XYZ fell 5%, XYZ would have a beta of 0.5.
Conversely, if the S&P rises 10%, a stock with a beta of 0.5 would be expected to rise only 5%. Beta cuts both ways.
It’s also not predictive; it’s a backward-looking metric that looks exclusively at past price performance.
That being said, a stock with a persistently low beta (absent material changes to the business or sector) would generally be expected to maintain that lower level of relative volatility.
It’s one way to manage the amount of expected risk that you take on when you buy stocks.
If you’re concerned that your portfolio is overexposed to risky assets, you can use lower-beta stocks to reduce the overall level of market risk in your portfolio.
It’s a potential alternative for moving to cash because you still have upside exposure to the market, just less of it, while cash, with a beta of 0, has no upside potential.
Using low-beta stocks to reduce market risk allows you to maintain your portfolio’s asset allocation (60/40 stocks and bonds, for instance) while simultaneously reducing overall portfolio volatility.
So why not build a portfolio of entirely low-beta stocks?
In strong bull markets, low-beta stocks won’t rise as quickly.
If too much of your portfolio is dedicated to these stocks you won’t take advantage of the market’s built-in upward bias.
Ultimately, it’s a tactical consideration, best used in small doses when you find yourself worrying too much about your investments.
There is, however, one extra step you can take to make up for the opportunity cost of low-beta stocks: yield.
A stock with an above-average yield can offset some of the underperformance that stocks with low betas can bring to your portfolio.
For example, if the market is up 10% in a year, but your low-beta stock is only up 5%, you’re underperforming by a full 5%.
But if your stock pays a 4% dividend (versus the S&P 500’s average dividend yield of 1.25%) that 2.75% difference in yield offsets a big chunk of the underperformance.
In that hypothetical, the total return of the S&P 500 is 11.25% (10% return + 1.25% dividend) and the total return of your stock is 9% (5% return + 4% dividend), which cuts your underperformance down to only 2.25%.
It’s not great to underperform the market by more than 2% a year, but it’s far more palatable than 5%, and it may be enough of a difference to make you more comfortable as the market navigates whatever environment you’re worried about.
With that in mind, we screened through the stocks in the S&P 500 to identify five stocks with the low betas (below 1) and high yields (above 5%).
They won’t be right for every investor, but they’re a good place to start looking if you’re not entirely comfortable with your portfolio volatility. The table below sorts these stocks from highest yield to lowest.
5 Stocks with High Yields & Low Beta
| Stock (Ticker) |
Of those five, Verizon (VZ) really jumps out due to its size, dividend history and current yield. Plus, it’s likely to be resilient regardless of the economic conditions for the rest of the year.
And resiliency is an important quality to have in your portfolio to help it avoid some of the extreme highs and lows in today’s volatile market.
