If you check your portfolio religiously like I do, you've probably noticed that certain holdings tend to show exaggerated price movements relative to the market. During last week's two-day 5.3% plunge in the S&P 500, these holdings might have dropped 6% or 7%. And on Friday's 1.4% recovery, they may have bounced 2% or 3%.
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Of course, sometimes there are concrete reasons (like earnings) to explain a sharp price swing up or down. But I'm not talking about an isolated movement triggered by company-specific news. I'm simply referring to the way certain stocks react to the normal ebb and flow of the market. Some are inherently more sensitive to general fluctuations than others.
A stock with a beta of 1.0 tends to move in perfect lockstep with the S&P 500. A higher beta of 2.0 indicates the stock will likely rise or fall twice as much as the crowd on a given session (wonderful on green days, not so much on red ones). Conversely, a lower beta of 0.5 suggests the stock tends to swing just half as much as the market.
It's possible for a stock to have a negative beta. That means there is a negative correlation, so these stocks often rise when the market is falling, and vice versa.
Power utilities are well-known for their stable trading and low betas, largely because electricity demand doesn't react much to economic slowdowns, interest rate hikes or other macro factors. Take El Paso Electric (NYSE: EE), which has a beta of 0.4. If the S&P were to drop 3% tomorrow, the stock would only be expected to slide 1.2%.
At the other end of the spectrum is an economically sensitive company such as Alaska Steel (NYSE: AKS), which has a beta of 2.6. On the same 3% down day that EE drops 1.2%, AKS might react more vigorously and decline 7.8%.
Let's Hunt For Low-Beta Stocks
As I write this, the percentage of fund managers expecting economic deceleration over the next year has risen to the highest level since November 2008. That alone is a strong argument for low-beta stocks to help cushion your portfolio during the next downturn.
But I've added another layer of security. One of the most reliable ways to determine how a stock might react in the next market selloff is to see how it performed during previous ones. Morningstar has done just that, evaluating returns in every down month over the past five years and ranking each stock on a scale from 1-10 (1 being those that held their ground best).
The table below shows the finalists that survived a screen for stocks with betas below 0.65, bear market rankings of 1 or 2 (top 20%), and dividend yields of at least three times the market average.
As always, this screen is meant to uncover potential candidates that meet certain criteria. These stocks haven't yet been researched and shouldn't necessarily be considered portfolio recommendations.
But we are long overdue for a market correction, and low-beta stocks like these can provide some ballast in rocky conditions.
A Deeper Look At A Standout
You're welcome to do your own research on the stocks in this list, but as always, if I find a real gem within these screens, my High-Yield Investing subscribers will be the first to hear about it. That said, there is one standout in this list I'd like to comment on...
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During the 800-point Dow freefall on Wednesday of last week, Omega Healthcare (NYSE: OHI) shares only lost a nickel, or 0.1%.
The company owns a sprawling portfolio of 923 healthcare properties in 41 states, mostly skilled nursing facilities leased to experienced operators. With an aging baby boom population, demand for specialized healthcare continues to grow. Omega receives steady rental revenues, while property expenses such as labor, insurance, and taxes are the responsibility of the tenant.
Thanks to prudent portfolio investments, the firm's operating cash flows have been growing at a healthy 10.3% pace since 2004. In turn, dividend distributions have risen 40% over the past five years alone -- resulting in a strong yield above 8%.
And over the past decade, the stock has delivered a total return of 277%, versus 153% for its peer group.
My Next Issue
If the idea of owning an entire fund of low-beta, blue-chip stocks appeals to you, then take a look at the Invesco S&P 500 Low Volatility ETF (NYSE: SPLV), which invests in 100 stocks with the least volatility over the past year.
In the 10 worst market pullbacks since 2011, the fund experienced only 43% of the market's downside loss -- and actually rose in one of the declines.
Concerned that the recent market turbulence might intensify into a full-blown correction?
My next pick can provide some cushion, without sacrificing a thing in terms of potential returns. This value-stock fund sports a dividend yield of 6.1% and has posted average annual gains of 14.8% over the past decade -- outrunning 99% of its peer group.
My High-Yield Investing subscribers will get the name and ticker symbol of this pick -- along with a full analysis -- early next week. If you'd like to join us in our search for the best high yields the market has to offer, and get the name of this pick -- as well as access to the rest of my portfolio, simply go here.