Bear markets, such as 2022, generally leave few places for investors to hide. Most stocks are priced with some level of growth in mind, and therefore, when the fear of recession or higher interest rates strikes, most stocks move lower. However, there are some stocks that offer a diversifying effect on one’s portfolio, in that they tend to move separate from the broader market.
One way to measure this diversifying component is through beta, which is a measure of volatility of a security against a benchmark. In this case, we can measure beta of stocks against the S&P 500, which gives us a measure of volatility of each stock relative to simply owning the S&P 500 through an index fund.
With this in mind, let’s take a look at three stocks that not only have low-beta values, but high dividend yields as well. This combination of factors makes them attractive to hold during bear markets.
An Appetizing Beta
Our first stock is McDonald’s (MCD) , the ubiquitous owner and franchisor of McDonald’s restaurants in the U.S. and internationally. The chain offers its famous line of sandwiches, fries, drinks, sides, and more. It operates or franchises about 40,000 stores globally, with only a small fraction of those being company-owned.
McDonald’s was founded in 1940, produces about $23 billion in annual revenue, and trades with a market cap of $200 billion.
McDonald’s stock has a five-year beta value of 0.65, which means it generally moves in the same direction over long periods as the S&P 500, but at 65% of the magnitude. In practice, that means that in theory, if the S&P 500 falls 10%, McDonald’s would be expected to fall 6.5%.
In practice, McDonald’s has risen about 1% so far in 2022, while the S&P 500 has declined 17%. That’s the power of holding diversifying stocks with low-beta values.
McDonald’s also has a very impressive 47-year streak of dividend increases, putting it in rare company on that measure. The payout ratio is currently just over 60% of earnings, so the dividend is very safe, particularly given the company’s reliable revenue and earnings….