The 3 Safest Stocks for a Turbulent Market

Friday, October 28, 2011 - 9:00am

by Lisa Springer

The nail-biting price volatility of the stock market shows no sign of easing anytime soon. Triple-digit price swings are occurring practically on a daily basis. Since August and through mid-October, the Dow Jones Industrial Average has moved up or down more than 100 basis points in a day in nearly three-quarters of the trading sessions, according to data from Dow Jones.

This price volatility is taking its toll on investors. Some have abandoned stocks altogether in favor of safer assets such as Treasuries. While greater safety sounds appealing, the trade-off is subpar returns. At present, 10-year Treasuries yield just 2.2%.

Fortunately, there is another strategy investors can use to minimize price swings in their portfolios and earn better returns than Treasuries. Both these goals can be achieved by owning low volatility stocks. Even better, these stocks tend to outperform the market over the long-haul.

[StreetAuthority co-founder Paul Tracy calls these "forever stocks." Simply put, they're safe, dependable stocks you can buy, hold practically forever, and sleep well at night doing it. [If you haven't seen his special presentation on "forever stocks," go here to learn more.]

Data show that low-volatility stocks outperform the market in the long run, without the big price fluctuations. For example, the Standard & Poor's Low Volatility Index, which consists of the 100 least volatile stocks in the S&P 500, gained 80% in the past decade compared with a return of 42.9% for the S&P 500, including reinvested dividends. Also, between 1968 and 2010, the least volatile large-cap U.S. stocks gained 10.2% a year and outperformed the most volatile large-cap stocks, which returned just 6.6% a year, according to Financial Analysts Journal.

The best way to find these low-volatility stocks is by using a simple tool called "beta," which measures the volatility of a given stock relative to the overall market. The overall market carries a beta value of 1, so a stock beta of 0.5 means the stock is half as volatile as the market. No need to calculate beta yourself; Yahoo Finance, Reuters and many other financial websites and databases calculate individual stock betas for you. 

I've found three great low beta stocks that are worth a further look. Adding these steady eddies to your portfolio should dampen price swings and help you sleep better at night.

1. General Mills (NYSE: GIS)
Beta: 0.22   
Yield: 3%

This global foods giant produces cereals, baked goods and other foods under the Cheerios, Wheaties and Pillsbury brands. In the past five years, the company's sales grew 5% a year to $14.9 billion, and earnings per share (EPS) improved 13% yearly to $2.48. A beta of 0.22 indicates that General Mills shares have less than a quarter of the market's volatility.

General Mills has a 113-year dividend history and has raised dividends an average of 11% in each of the past five years. The current $1.22 annual rate, gives shares a 3% yield. The company is very profitable, with 17% operating margins, twice the 8% food processing industry average, and 25% return on equity (ROE). Analysts predict General Mills' international expansion and new products will drive 8% annual earnings growth in the next five years. This stock won't deliver you fast-and-furious gains, but you can expect reasonable returns and steadily growing dividends with this stock in the long-term. 

2. The Southern Co. (NYSE: SO)
Beta: 0.28   
Yield: 4%

Because of highly predictable cash flow and earnings, utility stocks often have low betas. Southern is one of the least volatile utilities, with a beta of just 0.28.

Southern provides electricity to 4.4 million customers in Georgia, Alabama, Florida and Mississippi. Although Southern's sales grew 5% a year in the past five years to $17.5 billion, earnings per share grew much slower, just 2% year to $2.37, because of ongoing investments in new generating capacity. Future earnings, however, should rise as these new power plants come on-line. Analysts look for earnings growth to accelerate to 6% a year during the next five years.

Southern has paid dividends for 63 years and increased payments for 10 years in a row. In the past five years, dividends have grown 4% a year to a $1.89 annual rate. Southern shares yield 4.3% and have returned 11.8% a year to investors in the past decade. 

3. Kimberly Clark (NYSE: KMB)
Beta: 0.39   
Yield: 4%

Kimberly-Clark sells diapers, tissue and other paper items under the well-known Kleenex, Scott and Huggies brands. The company holds the No. 1 or No. 2 market share in more than 80 countries. During the past five years, Kimberly-Clark's sales grew 5% a year to a current $19.7 billion, while earnings per share also grew 5% a year, to a recent $4.68. Dividends have grown 10% a year during this time frame, to a current annual rate of $2.80.

In the next five years, Kimberly Clark plans to accelerate annual earnings growth to a 7-8% rate by cutting $500 million in costs, expanding in Asia and Latin America and boosting sales of higher-margin hygiene and health care products.

Kimberly Clark has hiked dividends for 39 years straight. Shares currently yield 3.8%

Risks to consider: Low-volatility stocks do well during bear markets, but can underperform badly during market rallies. For example, in 2009, low volatility stocks gained 19.2%, but underperformed compared to the S&P's 26.5% climb. To be successful with a low volatility strategy, you must commit for the long-term.

Action to take--> Any of these three stocks are low-risk holdings and are suitable for conservative portfolios. My top pick is General Mills, which has the lowest beta and the highest historic earnings and dividend growth of the three. I also like Kimberly Clark because of its steady dividend growth and expansion into high-growth emerging markets. Southern Company is a safe play on electricity demand as the U.S. economy recovers.

P.S. -- As I said earlier, these are the types of stocks that can give you a good night's sleep by not having to worry about the stock market's wild, day-to-day swings. If you're interested in learning more about "forever stocks," you should check out Paul Tracy's special presentation, "The 10 Best Stocks to Hold Forever."

Lisa Springer does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.