Sleep Better: 3 Dividend Stocks With High Yields and Low Volatility

When it comes to investing in stocks or other financial instruments, volatility is an unfortunate part of the deal. Price discovery dictates that there will be periods of rapid movements, and periods of slower movements, with the former being the cause of angst and fear among investors, in many cases. However, there are stocks investors can buy that offer lower volatility, which not only helps shareholders sleep at night, but can offer tangible financial benefits as well. Here, we'll discuss how to measure volatility, why investors would want to own low-volatility stocks, and provide three examples of great dividend stocks with high yields and low-volatility ratings. Measuring Volatility In order to find the best low-volatility dividend stocks, we must first be able to measure volatility. There are a variety of ways to accomplish this, but our preferred measure is by using beta. Put simply, beta is a measure of price movement relative to a benchmark. In other words, beta doesn't measure outright movement of a stock; rather, it measures the magnitude of movements against a benchmark over time. In practical terms, beta is used to measure a stock's movement against the S&P 500 or other index, as large indexes like that are generally less volatile than many individual names. Many resources online will calculate beta for investors, but the formula is actually quite simple. We need just three components to calculate beta: the risk-free Treasury rate, the price performance of the target asset over a fixed period, and the price performance of the benchmark over the same fixed period. We like five-year beta as a baseline of long-term volatility, but you could theoretically apply beta to any time period. By way of example, let's assume a risk-free Treasury rate of 2.5%, which is roughly where the 2-Year Treasury trades today, a stock that has a rate of return of 10.5%, and an index that has a rate of return of 7%. We calculate beta by first subtracting the risk-free rate (2.5%) from the stock's return (10.5%). That nets us 8%, which we then divide by the same calculation for the index (7%-2.5%). That calculation (8%/4.5%) gives us 1.78, which is the stock's beta value. That beta value would imply that the stock in question would be about 78% more volatile than the benchmark, meaning the investor should expect much larger price movements over time, and in both directions. Now that we understand the beta calculation, let's take a look at why one would want to employ a low-beta strategy. Why Low Beta? We all know that stocks, in general, rise over long periods of time. That would potentially suggest that one would want to just buy the highest beta stocks to take advantage of those big moves over time, but history suggests that's not necessarily a sound strategy. In addition, that is to say nothing of the emotional impact of high-beta names and their inherent price volatility. There is empirical evidence to suggest that low-beta names actually can outperform high-beta names over long periods, which may sound counterintuitive. However, remember that low-beta names should experience smaller drawdowns during tough periods, whereas high-beta names often see enormous bear market declines. While the recovery rallies may be larger on a percentage basis, over time, these big drawdowns are extremely damaging to returns. In conjunction with the added peace of mind that comes with lower beta names, this is why we like low-beta, high-yield investing. Now, let's take a look at three stocks that fit these criteria that we like today. Three Low-Beta, High-Yielding Stocks Our first low-beta, high-yield stock is telecommunications giant Verizon Communications , which provides millions of customers access to data through wireless service, broadband, TV, and more. The stock sports a current yield of 4.8%, which is more than triple that of the S&P 500. In addition, its beta is ultra-low at just 0.19 for the most recent five-year period. Verizon's average annual dividend increase in the past five years is 2%, so it's not a big growth story. However, Verizon offers utility-like stability, and that sizable yield to shareholders, all while diversifying risk through its very low beta value. Next up is payments company Western Union , which offers payments services to businesses and consumers worldwide. Western Union's current yield is exceptional at 4.9%, which puts it ahead of most dividend stocks on that measure. Its beta is actually negative over the past five years, meaning it moves somewhat inversely to the S&P 500. We calculate five-year beta at -0.55, meaning we'd expect the stock to move inversely to the S&P 500, at about 55% magnitude. Stocks with negative betas can offer a strong diversifying element to investors' portfolios, particularly during downturns when most stocks are falling. Our third stock is Walgreens Boots Alliance , the retail and pharmacy giant that operates Duane Reade, Walgreens, and Boots stores in the U.S. and U.K., primarily. Walgreens sports a yield of 4.2% today, which also puts it in the high-yield category. Walgreens' beta value is also negative, meaning it generally moves inversely to the S&P 500 over longer periods. That's not unusual with defensive categories like healthcare, but Walgreens has a nearly perfect inverse correlation to the S&P 500 at -0.94. Given Walgreens' inherent recession resistance, and its negative beta value, we think it's a strong pick for not only achieving a high dividend yield, but the diversifying impact of a stock that moves inversely to the benchmark. Final Thoughts While investing in high-beta names may seem attractive given the large price movements inherent to the group, over time, we find that low-beta names can actually provide not only more stable price action, but better overall returns. When we stack high dividend yields onto that, the potential is enormous, and can make all the difference for an investor when it comes time to stop working. We like Verizon, Western Union, and Walgreens Boots Alliance for their low (or negative) beta values, as well as their REIT-like dividend yields.

Sleep Better: 3 Dividend Stocks With High Yields and Low Volatility

It may sound counterintuitive, but there is evidence suggesting that low-beta names can outperform high-beta names over long periods.

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