Decades from now, economic historians will look back at this period as the era of exceptionably low interest rates. Just as people now shake their heads in disbelief of double-digit Treasury yields and mortgage rates in the early 1980s, years from now people will envy our sub-4% mortgage rates and wonder why anyone ever lent the U.S. government money at a fixed 1.5% for 10 years.
Unfortunately for savers and income investors, this era of low rates is likely to continue for the foreseeable future. But there is one place where investors can still generate solid income on their investments: dividend stocks.
A Smoother Path to Outperformance
Despite the fact that stocks have generated the highest returns for investors over the long run compared to any other asset class, many investors shun them because of their relatively high volatility.
But there is a smoother path to strong returns in stocks for any investor.
The first step on this path is to focus on dividends. Total return comes from two places: price appreciation and dividends. While stock prices will fluctuate daily depending on the headlines of the day, companies usually pay out stable quarterly dividends, often with annual increases. So investors who focus on dividends generate smoother total returns year-to-year than those who rely on price appreciation alone.
The next step for investors worried about volatility in the stock market is to lower their beta.
Beta measures a stock's volatility relative to the volatility of the overall stock market. The market - often represented by the S&P 500 - has a beta of 1. So a stock with a beta of 1 generally moves in the same direction as the overall market. A stock with a beta greater than 1 tends to be more volatile than the market. But a stock with a beta of less than 1 tends to be less volatile than the market.
Please note, however, that beta is far from perfect as a measure of risk, so make sure to do your homework before investing in any stock.
4 Stocks to Consider
For investors looking for stable income and less volatility than the overall stock market, here are 4 high yield, low beta stocks to consider:
McDonald's Corporation (MCD)
Dividend Yield: 3.4%
The Golden Arches offers investors stability and consistently rising income. With a beta of just 0.39, the stock moves less than half as much as the overall stock market. On top of that, it has increased its dividend every year since 1976. Since 2000, it has increased it at a remarkable 25% compound annual rate.
General Mills, Inc. (GIS)
Dividend Yield: 3.2%
General Mills has a portfolio of famous brands like Cheerios, Betty Crocker, Pillsbury, Green Giant, Yoplait, Nature Valley, Old El Paso and Häagen-Dazs. And these consumer staples don't fluctuate much with the overall economy. This stability has allowed General Mills to go 113 years without a dividend cut. And since 2000, it has increased its dividend at a compound annual growth rate of 8%.
Baxter International Inc. (BAX)
Dividend Yield: 2.6%
Baxter International is a health care company mainly focused on products to treat hemophilia, immune disorders, infectious diseases, kidney disease, trauma, and other chronic and acute medical conditions. It reports its results in two segments: BioScience (44% of total sales) and Medical Products (56%). Its positioning in the healthcare sector provides it with both growth and defense. The company has grown steadily throughout all economic conditions and has increased its dividend at a compound annual growth rate of 10% since 2000.
Chesapeake Utilities Corp (CPK)
Dividend Yield: 3.2%
Chesapeake Utilities is a diversified utility company with three primary business segments: Regulated Energy (Natural Gas & Electric Operations), Unregulated Energy (Natural Gas Marketing, Propane Operations), and Other (Advanced Information Services). Chesapeake distributes natural gas to over 145,000 residential, commercial, and industrial customers on the Delmarva Peninsula and across portions of Florida. Its stable business model has allowed the company to increase its dividend every year since 2004 at a compound annual rate of 3%.
The Bottom Line
Through solid dividends and low betas, it is possible for income investors to earn strong yields in the stock market with relatively low volatility. These 4 stocks offer just that.
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