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. The yield is currently 2.2%, which is about 60 basis points better than the S&P 500.
We also expect to see 6% annualized earnings growth for the foreseeable future, meaning McDonald’s should have plenty of runway to continue to increase its dividend for many years to come.
Finally, despite the fact that McDonald’s operates in what is generally a very cyclical sector — restaurants — its entrenched position and value proposition means that its earnings hold up during recessions much better than most of its peers. In fact, during recessions, McDonald’s tends to gain share given its value proposition, so even in the event of a recession, we see McDonald’s as a strong performer.
‘Sanitize’ Your Portfolio
Our next stock is Clorox (CLX) , a company that manufactures and distributes a huge array of consumer and professional cleaning products worldwide. The company operates in four segments: Health and Wellness, Household, Lifestyle, and International. Through these segments, Clorox distributes its namesake Clorox cleaning products, but also has a long slate of other cleaners, food products, vitamins and supplements, as well as pet supplies and more.
Clorox was found in 1913, generates about $7.1 billion in annual revenue, and has a current market cap of just over $18 billion.
Clorox has a five-year beta value of just 0.29, meaning that it tends to mostly move independent of the S&P 500. This stock, therefore, has a significant diversifying effect on one’s portfolio, which is particularly useful during bear markets. Thus far in 2022, Clorox has roughly matched the S&P 500 with a price return of -16%.
Clorox also has a dividend streak approaching 50 years, meaning it is also exemplary when it comes to dividend longevity. The company’s payout ratio is actually in excess of earnings for this year, but that should be temporary. Clorox experienced a boom into the pandemic and that is unwinding to an extent. We see normalized earnings in the years to come as 12% earnings growth from currently low levels should make the dividend more sustainable again.
Clorox is yielding 3.2% today, which is about double that of the S&P 500, so it’s a strong income stock as well.
Finally, Clorox sells what are mostly staples, meaning recessions do little to dampen demand. That means it stands up well during bear markets and recessions.
A Dividend King in Waiting
Our final stock is Walmart (WMT) , the famous value leader in general retail. The company’s stores number more than 10,000 globally, and they collectively supply hundreds of millions of people every year with groceries, pantry items, household, automotive, and gardening products, and much more.
Walmart was founded in 1945, generates a staggering $600 billion in annual revenue, and trades with a market cap of $417 billion.
Walmart’s five-year beta is 0.53 against the S&P 500, so it is between McDonald’s and Clorox in terms of its diversifying impact. Walmart is up 6% this year, beating the S&P 500 by about 23% in 2022.
The company sports a 49-year streak of dividend increases, and we expect that the next dividend the company declares will make it a Dividend King. The payout ratio is extremely low at just 38%, so the dividend has many years of likely increases in front of it. We also see 8% earnings growth in the years to come, meaning Walmart is likely to be a robust dividend growth stock in the years ahead.
The yield is about equal with the S&P 500, so it isn’t quite the pure income stock that Clorox is, for example.
Finally, Walmart is famous in the investing community for its recession resilience, given it is the ultimate value proposition when it comes to physical retail. The company’s low-price strategy means it stands up very well during all kinds of economic conditions.
Final Thoughts
While bear markets can be tough to handle, there are strategies investors can utilize to minimize the negative impact. Finding great dividend stocks with low-beta values — such as McDonald’s, Clorox, and Walmart — can provide investors a safe haven in terms of low volatility and income.
As an example, these three stocks in 2022 in equal parts would have returned -3%, excluding dividends, and would yield 2.3%. Those percentages compare quite favorably to the -17% price return and 1.6% yield of the S&P 500. Such is the power of low-beta stocks, and we like these three for that reason during what has been a tough bear market in 2022.
