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Believe it or not, low volatility stocks tend to outperform the market.
Investing in low volatility names with steady dividends could well be a better strategy than trying to time the market.
The S&P 500 Low Volatility ETF is up 9.3% year to date, compared to the S&P 500, which is only up 6.8%.
Throw in the dividends these stocks pay and you have a recipe for long-term outperformance.
That’s because these stocks are slow and steady. They won’t make you rich overnight. But you also aren’t likely to lose 30% of your investment in just a matter of months.
The three low volatility, dividend paying, stocks below have all beat the market handily over the last 20 years on a total return basis (dividends and stock price appreciation). Each have beaten the S&P 500 by well over 250 percentage points over the last two decades.
Here are the top 3 low volatility stocks that beat the market:
No. 1 Low Volatility Stock For Beating The Market: Procter & Gamble (NYSE: PG)
P&G is a great long-term performer. It’s outperformed the S&P 500 on a total return basis by some 300 percentage points over the last 20 years. Yet, it’s been a perennial underperformer over the last year or so, underperforming the S&P 500 by 17 percentage points on a total return basis over the last twelve months.
However, despite being a large multinational company, its fiscal 3Q earnings were up 5% year over year, and it beat consensus by 3%. This comes even as P&G notes that it’s operating in a slow-growth, high-competition, environment.
Its dividend yield comes in at the highest of the three low volatility stocks listed at 3.2%. It also has one of the longest streaks of dividend increases in the market, coming in at 57 consecutive years.
P&G has a beta (measure of volatility) 0.38 — meaning that when the market loses a $1, on average P&G only loses $0.38.
No. 2 Low Volatility Stock For Beating The Market: General Mills (NYSE: GIS)
General Mills offers a 3.1% dividend yield and has upped its payment for 10 straight years. It has the lowest beta of the three and one of the lowest betas in the entire market. Its beta is an ultra-low 0.13.
This global foods company is one of the leaders when it comes to cereals. It’s attacking the health and nutrition market with new products. These products actually make up nearly 70% of General Mills’ U.S. retail volume.
The other key for General Mills is to focus on diversifying outside the U.S. Its focus is on emerging markets where there’s a growing middle class that can spend more on branded goods.
This includes a focus on China, Brazil, India and Russia. It generates just around a third of its sales from international markets and has been growing sales outside the U.S. nicely. Over the last six years, international sales have been growing at an annualized rate in the high single-digits.
No. 3 Low Volatility Stock For Beating The Market: Eli Lilly (NYSE: LLY)
Eli Lilly’s dividend yield comes in at 3.1% and its beta is at 0.43. Eli Lilly also has a $5 billion buyback program, good enough to reduce shares outstanding by over 7%.
Eli Lilly is a global pharma company. The company focuses on central nervous system, cardiovascular diseases and cancer. After various drugs coming off patent this year, it’s expecting a solid 2015, where it plans to launch new products, such as empagliflozin and Cyramza.
There’s also cost cutting that should help boost margins, namely lowering research and development, and selling, general and administrative expenses. Emerging markets should also be a solid growth opportunity. This includes focusing on Japan, where products, such as Zyprexa and Cymbalta, should be big hits.
Low volatility stocks have proven to be great ways to beat the market. The three above have proven to be great ways to do just that, and could still be great ways to build wealth over the long-term.
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