Market Overview

Yes, Virginia, There are High Rewards from Low Risk Stocks

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Here's something to mull over: Research by Russell Investments found that stocks that were the least volatile and the least risky performed the best over time. In other words, low-risk equities returned the highest rewards to investors.

According to two studies by Russell Investments, the first covering 1986 through 2006 and the other 1968 through 2008, stocks with the highest betas had lower returns than "stodgier, more defensive stocks."

That only makes sense, even though it does counter the old axiom of Wall Street that "the more risk you take, the greater the potential rewards."

But stocks have low betas from investors not selling. The reason that the shareholders are not selling is that they are very pleased with the investment. If they were not, they would sell -- leading to a high beta stock with low returns. 

The payment of a dividend helps to make an equity more stable, with a lower beta as the result. It also increases the total return. Income seekers hang on to their holdings, as to enjoy growth in the dividend. That is especially true for "Dividend Aristocrats" -- stocks that have raised their dividend annually for at least 25 years.

Pepsico (NYSE: PEP) is an excellent example of a Dividend Aristocrat with a low beta and a high return for its shareholders.

The beta for the beverage and snack food giant is 0.39, well below the 1 for the entire market. The dividend yield for Pepsico is 2.72 percent, much higher than the average of around 1.9 percent for a member of the Standard & Poor's 500 Index.

Over the last year, Pepsico is up about 25 percent. Factor in the dividend, and you have a total return of close to 30 percent. With a 5-year dividend growth rate of 6.25 percent, it pays to hold shares of Pepsico for the long term. 

That is what leads to the low beta.

It is the same with ConAgra Foods (NYSE: CAG). Up nearly 16 percent for the last year of market action, ConAgra has a beta of 0.63. Its shareholders receive a dividend of 3.16 percent.

There are many small caps that are high reward, low risk stocks, too.

IdaCorp (NYSE: IDA) is a small cap utility, based in Boise, Idaho. The beta is 0.45 and the dividend yield is 3.31 percent. For 2013, IdaCorp has soared more than 22 percent.

McDonalds (NYSE: MCD), Coca-Cola (NYSE: KO), Wal-Mart (NYSE: WMT) and other blue chips have the same features: Coca-Cola has a beta of 0.41 and a dividend yield of 2.87 percent; Wal-Mart has a beta of 0.38 and a 2.48 percent dividend; and for McDonald's, the beta is 0.37 with a dividend yield of 3.44 percent.

So investors can have it all: High rewards and low risks from equities.

But the stocks must be held for the long term to realize the greatest returns from the rising share price. This allows for the dividend growth to increase the yield, too. From that, the total return should far exceed what one would expect from the safest of stocks.

Posted-In: Education Long Ideas News Guidance Dividends Small Cap Analysis Economics Trading Ideas Best of Benzinga

 

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